The Transmutation of Economics: Moral to Pragmatic Values

0:00The subject matter that Joe asked me to present here at the Mises Institute is how economics has been transformed in the past 2,000 years. So it's a very, very long shot. Basically, I'm presenting the conclusions. Economics was born as a moral discipline. From Aristotle to the Salamanca School of Economics, economics was not divorced from moral values. Economics is emancipated in the 19th century and courts the natural sciences.

0:46Physics was the main type of science and economics becomes part of the managerial epistem in the second half of the 20th century. Until the 17th century, economics was a discipline whose aim was to promote the good life of the state, the community and the individual. Aristotle, Augustine, Aquinas and the Salmantean Neoscholastics thought that prudence and justice were the virtues that applied to the government of the family, Oikos, and the city-state, Pholis, or the state, the respublica.

1:31Prudence, or practical wisdom, was the virtue of the head of the family in order to provide the necessary goods and rules to those in his charge. We have to recall that the family in Greece and Rome was not only what we call the parents and sons, but it was all the king, and we had the slaves and the clients also. And so the paterfamilias had in charge many different persons. Oeconomia means the prudential ruling of the household, oikos and nomos, as you probably know. On the other hand, justice, diques or dikayas, meant the virtue of him that is in charge of the community and that concerns the order of things, groups and persons in society in order to achieve the common good.

2:27For example, in this sense, justice has been characterized in different ways. For example, for Plato, justice was basically the way in which everyone fulfilled their duties. Augustine believes that justice is concordia, which means everyone has the same heart. And thus The Central Problem of Economics as a Moral Discipline In order to understand a phenomenon, we need to know, among other things, its purpose. What's the purpose of economics?

3:12To understand a discipline, we need to understand the problem which it concerns with. For example, until the 17th century, the central problem of economics was how to live a good life. That's undoubtedly a moral problem. Such was the concern of Aristotle, Augustine, Aquinas, Vitoria, Suarez, Molina, Covarrubias, Mariana and all of the moral economists of the School of Salamanca. But during the 17th century, the Western world experienced the scientific revolutions in which Francis Bacon, Tommaso Campanella, Thomas Hobbes, René Descartes, Galileo Galilei and Isaac Newton showed a different kind of world, introducing a new episteme that would transform the world in the short span of 300 years.

4:12But they were not only the scientific revolutions, we had some other kind of revolutions also. For example, in the 17th century we find that England had two revolutions, one which was after the civil wars, the two civil wars in the early 17th century and then after the so-called glorious revolution of 1688. Here we find the Peace of Westphalia, which finished the religion wars in the 17th century, but which is important, I believe, because it basically established a new political order in the world. We find that at that moment really the modern states appeared.

4:58We also find that in England was established the Commonwealth. We find that the Dutch rose and became the first global nation, the first global empire. And of course we find booleanism in economics as proposed by Mills and Malin. Capitalism and Mercantilism. This is a very important change that we had. By the middle of the 16th century, it is no longer the good life, the purpose of economics. Wealth is progressively defined as the amount of bullion, whether gold or silver, held in a treasure chest. Why is this? Basically, we find that the modern states are being formed and thus Because the kingdoms or the republics that existed in the new European political order needed to increase and keep their bullion stops through protectionism, the definition of mercantilism.

6:10Why was this? Basically we find that technological innovation, political innovations, required new warfare strategies that required larger and much costlier armies. So we had to get money, gold or silver to pay for the hardness. And so the birth of modern state inaugurates the birth of political economy. The birth of the modern state appeared also with a new episteme, the classificatory episteme. Epistems, we could define them as the matrix structuring the ideas of an epoch. Thus, what had been moral economics is transformed into the new discipline studying the political economy, the wealth and welfare of the state, political economies.

7:05And this classificatory epistem, which basically is, we find it from the late 16th to the early 18th century, classifies public and private, state and family, men and women. So, we find for example that economics, we find political economy and domestic economy, which in Mexico still 40 years ago was taught for ladies, domestic economy, how to rule the house. That's true. And men rule the state and women rule the family. Thus, but something happens.

7:50And probably as a result of these new epistems and this new social and political environment, the Industrial Revolution, coal and iron happens. This is the age of Adam Smith, David Ricardo, Karl Marx and John Stuart Mill. Mill. This is the age of political economy and thus we find that basically each of these authors try to solve a specific problem, all of them in the political economy. For example, Adam Smith answers the question of what is wealth? David Ricardo focuses on how wealth is divided among the factors and the comparative advantages in wealth creation among nations.

8:42Karl Marx perceives the inherent instability of capitalism due to the class structure of capital accumulation. He will tell us that as capital grows, then the rate of return will diminish and thus produce the crisis. Basically, economics still deals with human values, but shows a malignant tendency to produce crisis. And this is the age of physics. That 19th century was the age of physics. Physics becomes a paradigmatic science in the 19th century. Physics describes nature and discovers laws. shows that nature tends to equilibrium, economics must also tend to equilibrium, and thus we have Alfred Marshall with his Principles of Economics, Leon Walrast with Elements of Pure Economics, showing that economics tends to equilibrium.

9:47However, the standard model cannot be rigorously derived in general from the theory of general equilibrium, Although Kenneth Arrow and Gerald de Broglie gave a more rigorous argument of equilibrium. Equilibrium or crisis? If the 19th century episteme was historical, this is the third episteme that I'm talking about. The second half of the 20th century is a managerial episteme. Everything and anything The United States, for example, created a successful political plan in 1787, its constitution, and the Soviet Union in the 20s created what was thought to be a successful economic plan The Great Depression and Other Crisis In the 1929 Great Depression was not a unique occurrence in the history of capitalism.

11:03We can find that capitalism has produced crisis very frequently. Previously in 1907, 1893, 1873 in the U.S., 1848, and then we find other crisis this morning. We heard about the crisis in the 20s, in the 12s, etc. Crisis do happen in France, England, all Europe. The question arises in the 20th century, can we manage the economy to avoid the crisis and have sustained economic growth. Now we have this Mises and Hayek versus John Maynard Keynes. While Austrian economics intend to describe the economic processes, Keynes and his followers intend to manage the economy. Is it possible to manage the economy? The dividing line between these two schools of thought is whether we are talking about description or prescription, the Austrians would describe, the Keynesians would prescribe.

12:16Now going to the Catholic Social Doctrine, Catholicism intends to provide Catholic answers to the Catholic human reality and I'm using Catholic in the sense of universal. So we have a Catholic anthropology, a Catholic economics, a Catholic sociology, universal, and we find that in this spirit, no man is in Ireland. I know that this is not a praise of the Catholic Church, but John Donne. But I think that this idea reflects what the Catholics believe. No man is in Ireland. The individual and the community are not separated realities. Money and Soul constitute the whole man.

13:03Man has a temporal and an eternal destiny. Also, we find that the fathers of the Church in the first five centuries established the principles of what would be called then the social doctrine of the Church. And here we have several different encyclicals. For example, Pope Leo XIII produced, published an encyclical called Rerum Novarum on the The Rights and Duties of Capital and Labor, that was in 1891, in which the Church rejects both communism and unrestricted capitalism, while defending private property and the right of workers to form unions. It defends the right of workers to wage sufficient to sustain with dignity his family.

13:52Then 40 years later, Pope Pius XI publishes the Quadragesi Moana and Cyclical, in which he calls for the reconstruction of social order based on two principles, solidarity and subsidarity. But he also says that the Church has a role in discussing social matters. The Church won't accept that there is a different realm in which something has to happen inside Labor is not a merchandise, so it is not subject to supply and demand. Three elements determine the fair wage, says Pope XI, the worker's family responsibilities, the economic condition of the enterprise, and the condition of the economy as a whole.

14:49we have to take into account those three elements. Then Pope John XXIII publishes Mater et Magistra in 1961 and returns to the issues of social progress. This happens 70 years, I believe, after Leo XIII encyclical. In this encyclical, John XXIII returns to the issues returns to the issues of social progress. In it, the Church suggests that governments have the duty to diminish the distance between the haves and not-haves. Justice and equity are essential moral requisites of economics. It reaffirms that private property is a natural right, as well as the right of workers to form unions.

15:43Then we find Pope Paul's sixth Populurum Progressio, which was published in 1967, urging Catholics on the need to promote the development of peoples. He says, the fruits of economic growth need to be distributed among all men. This translates into the right of the workers to adjust wage, the right to security of employment, the right to fair and reasonable working conditions, The right to join a union and the universal destination of resources and goods. Some people won't like this. But then we find what Pope John Paul II and Benedict have also published, Solicitudo Reis Socialis in 1987 and Caritas in Veritate in 2009, which refer to the social doctrine of the Church.

16:40Catholic activity should have the well-being of each individual person as its goal. I could probably summarize what all of these things say. The well-being of the person as the goal of economics. Could I change? Then is there a Catholic economics? Catholic doctrine is universalistic and holistic. It does not allow for the division of what is in essence a unity, man as a social and rational individual. Catholic social doctrine does not recognize the existence of the pure homo economicus. Man is a unity of flesh and spirit with an eternal destiny to be worked out in this world in time. The Catholic Church cannot be indifferent to man's temporal matters.

17:36Catholicism and Church Doctrine emphasize then the unity of man and thus of a general vision to understand it and show the way to man's long-term temporal and eternal destiny. The Catholic Church acts as a mother and a teacher, mater et magistra, as John XXIII said, and thus teaches that every human act is a moral act. We cannot separate any act of man since it is a free act from morality. Thus, economic activity needs to be understood and ruled by a moral code. The Catholic Church's vision of economics drawn from social doctrine teaches that man is a unity and an end by itself, man is a rational social individual, man cannot attain its ends temporal or eternal in isolation, man was created with free will, and all social institutions are created to promote every single man's well-being.

18:47And we can say that the economy is only a means, not an end. The economy must be subordinated to the well-being of the individual person and that community. And it has been shown, this is what the Church says, shown in history, going back to what Armando said, that private property is an essential protection for the individual's well-being. It has been shown also in history that markets are in general the most efficient mechanism to assign resources to human purposes. Thus, I think that there is no contradiction between what the Catholic Church teaches and what Mises or Hayek teach.

19:32Thank you very much.