Meeting with global-finance students recently at the Chartreux Institute in Lyon, France, Pope Francis warned them to remain free from the lure of money, from the slavery in which money traps those who worship it. He also counseled them not to blindly obey the invisible hand of the market but rather to become promoters and defenders of a growth in equality.
Even though Im a professional economist, I am sympathetic to Pope Franciss remarks. Indeed, I think many of my colleagues are too quick to dismiss criticisms of the market as being unsophisticated, and they ignore the wise sentiments that motivate the popular distrust of capitalism. In the Independent Institutes new collection of essays, Pope Francis and the Caring Society, my fellow contributors and I did our best to grapple with the popes calls for social justice as we unapologetically defended the benefits of private property and market prices.
Regarding his specific remarks to the students in Lyon, I hope we can all agree with Pope Francis that the lure of money is indeed a trap for those who worship it (as he put it). The Bible teaches that the love of money is the root of all evil, and people of all religious traditionsor none at allcan surely recognize that the single-minded pursuit of material wealth is no way to live.
Having agreed with the pope thus far, where I strongly differ is in his dismissal of the invisible hand. Its not merely that I think Pope Francis needs to better appreciate the workings of the market economy. As a Christian myself, I think Adam Smiths famous metaphor illustrates a pattern in the way a loving God deals with His fallen children.
To set the context, in his treatise The Wealth of Nations (1776), Adam Smith famously wrote,
By preferring the support of domestic to that of foreign industry, [an individual] intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
Smith is showing that the government doesnt need to promote domestic industry, because individuals who seek only their own narrow gain will do so on their own.
This helps us see that Pope Francis has set up a false dichotomy: He seems to be urging those entering the financial sector to ignore market signals and personal gain in order to better help the poor and downtrodden. Yet Adam Smiths point was that people who are pursuing personal gainas long as their activity relies on exchanges that are consensual among all participantsend up unwittingly promoting the welfare of others.
Christians especially should appreciate this aspect of capitalism. Just as Genesis has Joseph telling his brotherswho had plotted against himthat God turned their evil actions to serve good, so too did Adam Smith view the invisible hand as a benevolent mechanism that harnesses the greed and ambition of the few in order to shower benefits on the masses. Think about it: In modern times, the only way to become a billionaire in the free market is to create a new product or service that millions of people want or enjoy.
If it were just a matter of incentives, then Pope Francis might retort that the invisible hand is a good safety net, but that people should nonetheless striveto do the right thing in the first place. Yet here is where the subsequent work of economists has added to Adam Smith. As thinkers such as Friedrich Hayek emphasized, humans know very little about the modern global economy. Each person, no matter how intelligent, can understand only an extremely tiny fraction of what it would take to improve the general welfare.
To coordinate economic activity and better serve others, humans need to rely on the information embedded in market prices, just as surely as they rely on the information transmitted by phone, radio, and computer. Students entering a career in finance need to be guided by market pricesand their signaling of profit and lossjust as surely as they need to be guided by traffic lights and the rules of grammar.
To best promote the material development of the poorest regions on earthand thereby reduce inequalitypeople entering the field of finance should play their part in boosting the profitability of firms that engage in voluntary trades. The pursuit of profit wont hurt the worlds poor. It does, however, threaten the souls of those who make such a pursuit their highest goal. In this the pope is absolutely right.