markets

Malibu, CA

Where does Catholic Social Thought come down on this question? Not surprisingly, Catholic thought often emphasizes solutions taken at the level of the economic and political system: government-provided safety nets, support for unions, regulation of the labor market. The idea of social justice takes for granted a need to act at a system-wide level to address social problems.

You may be surprised, though, to find that Catholic Social Thought places expectations on the business owner, as well as the government official, for social justice. If actual markets leave as little room for businesses to act toward any goal but the maximization of profit by any legal means, then what shall we make of John Paul II’s exhortations in Centesimus Annus?

Profit is a regulator of the life of a business, but it is not the only one; other human and moral factors must also be considered which, in the long term, are at least equally important for the life of a business (para. 35).

If the maximization of profit is only one of the goals of a business, which exists as a “community of persons,” there must be some room for the pursuit of goals other than profits in markets.

In Centesimus Annus, John Paul II, after affirming the need for government to oversee the “the exercise of human rights in the economic sector.” However, he goes on to say that 

primary responsibility in this area [the area of human rights] belongs not to the State but to individuals and to the various groups and associations which make up society (para. 48). 

It makes no sense to place primary responsibility on individuals and groups if they have no practical scope, if they cannot act other than market pressures dictate.

John Paul II was not alone in expecting more from business owners. In Caritas in Veritate, Benedict XVI criticized ways of thinking in which the business sector was morally neutral, in which for profit-businesses focused on efficiency, the government sector ensured distributive justice, and the non-profit sector charity. Instead, Benedict encouraged us to create space for the operation of justice and charity in the for-profit sector. Again, it makes no sense to expect charity to operate in the private sector if business owners have no practical space in which to allow love and care for workers to operate.

According to Lumen Gentium, from Vatican II, lay Catholics are supposed to be leaven in the world. 

They are called there to the secular order] by God that by exercising their proper function and led by the spirit of the Gospel they may work for the sanctification of the world from within as a leaven. 

Think about what his means.  Leaven does not work to raise the bread according to some master plan, executed from the national Department of Leaven. The leaven is not a voting bloc; it is instead a sort of local catalyst. Each bit of leaven works where it is, and the dough rises.

Catholic social teaching, while assigning a crucial role to government in the promotion of rights, demands that businesses play their appropriate subsidiary role. Is it possible for them to do so, and remain viable in competitive markets?  Or is Catholic Social Teaching demanding something impossible?

I worry that economic theory contributes to the Market Made Me Do It attitude, by making it seem that there is no room for moral agency in business, by the way it presents the concept of competitive markets. In the economic account of competitive markets, the business owner is a price taker: he has no control over the price, which is revealed in some mysterious way in market transactions.  His only choice is over output, which is chosen to maximize his profits.  In both labor and capital markets the business owner is also a price taker.  In the long run, competitive pressures from entry and exit will drive his economic profits down to zero: he will earn the same rate of return on his investment that he could have earned in other industries.

There is not much room for moral agency in this model.  If the business owner thinks the market wage is too low, and decides to pay his workers more, or if he resists cutting his workforce when demand is slack, or if the business contributes to the community out of profits in a truly disinterested way, his profits will fall below the market rate of return, and he will risk being driven out of business or bought out by a less scrupulous employer who will act to maximize profits.  What’s a moral person to do?  “The market made me do it.”

If the Market makes us do it, then we can’t expect much to be accomplished when we try to make businesses more human. The only way to exercise solidarity is to try to make systemic changes, to change the rules under which we must operate. It is impossible if all markets fit the perfectly competitive model of economic theory.  

Most real markets, however (even competitive markets), are full of niches: geographic, brand, service niches.  Long-term relationships with customers and suppliers, barriers to entry, and the unique skills and talents of workers and employers create ‘economic rents’—that is, profits that are not easily competed away.  They can provide a space—sometimes only a little space—to give fuller rein to an employer’s desire to more fully include the interests of employees and other stakeholders in his business decisions.

Mainstream economics can easily miss the room for moral agency in economics, because it often ignores the reality of imperfect competition, and lacks an analytical language to describe the challenges and contributions of entrepreneurs.  

There is a larger point here. The analytical models that we use to understand the economy, and to run a business, are not enough to fully understand the economy, and are not enough to act in it.  For example, the competitive model of supply and demand doesn’t tell us how buyers and sellers find each other, figure out what prices to pay, or set up and staff production operations. These things happen without being described in an economic model. Economists don’t know how new products come about.  A couple of nights ago Matthew Brach told me about newly minted finance college grads who cling to their spreadsheet models of valuation, reluctant to make the rule of thumb adjustments and to add in things that don’t fit the model—is the company losing long-term clients, for example. Although the spreadsheets and valuation formulas are necessary to sound valuation, they are not sufficient. Valuation must always make use of the framework, but must always go beyond it.

What I’m trying to say is: there will always be a big gap between economic descriptions of the economy, and of how people act in the economy, and what it is like to make a real decision. And what fills the gaps in the theory—what Catholic Social Thought calls practical wisdom, practical judgment—is crucial to the operation of the economy, even though we cannot describe it precisely. 

What fills the gaps?  People making decisions, entrepreneurs developing new products, making things happen that we economists can’t predict or explain fully. An entrepreneur specializes in making things happen in the messy, uncertain environments in which businesses operate. There is little room for the entrepreneur in economics, since the messy, uncertain details of business have been assumed away—we assume that everyone knows what the demand curves and cost curves look like, and new products, technologies, and business organizations come into being magically, without any entrepreneurial enterprise.  

Many of our students already are entrepreneurs, or soon will be; they are often attracted to the challenge of making something new happen in environments where no one expected it could be done, of finding a way.  The challenges facing the entrepreneur are similar to the challenges facing the moral business owner: how to create value where none was before, how to create an organization that generates benefits not just for the entrepreneur but for customers.  The challenge of creating a business that has aspects of a good community of capital owners, customers, and workers is the same sort of challenge.  There are remarkable people out there trying to make these sorts of businesses work, and succeeding.  Sometimes it will not be possible, but sometimes it will—it is a challenge worthy of, and big enough for, a morally serious entrepreneur.

The work of the morally serious entrepreneur will not be visible in economic models, because entrepreneurial activity is invisible to economic models. So there is space for this work.

There will of course be times when market pressures will force a business to make difficult choices with real human costs: to let people go who need the work, for example.  In preparation for this talk I wanted to read case studies of firms which are trying to do things differently—to make products which are good for people and to provide for good work: to pay more, to avoid layoffs, for example. Mike Naughton and David Specht have done us all a real service with this collection of case studies, Leading Wisely in Difficult Times

We need more books like this, stories about how it is possible to live your faith in business without minimizing the difficulties.  And what I love about this book is that the “Difficult Times” are distressingly real: all of these companies face severe competitive pressures, demands for cost cuts from customers, and being true to stated values is difficult and discouraging work.

What practical advice can be gleaned from this book, and from the talks we’ve heard at this conference?  I have three pieces of advice.

First, watch your language. How we speak affects how we think, and how we think can constrain us and close us off to the possibilities. The challenge to work in business and to lead differently is a social challenge. Sean Fieler in his talk on finance noted that the way we talk about business and finance matters—are investments ‘plays’, are managers ‘jockeys’, are people ‘seats’, are customers just competitors in the game?  Bob Kennedy resists saying that people work for him, instead reminding himself that he is working with them, and that his job is to help arrange things so that they can contribute to the common project. Mission statements don’t matter if they are ignored, of course, but they can be an important source of concepts and language, to help a company to frame its challenges, to hold it accountable to its principles, particularly when times are tough. 

A second piece of advice is to embody your principles in a set of practices. Don’t leave them in the mission statement. Families that want to maintain their unity adopt practices like “eat dinner together,” “say the rosary together,” “have a game night at least every other week.” In the same way, a company that is serious about its values must make them real in practices. Practices help to develop habits.  One of my favorite stories from this book is that of a new manager who was told of an unusual practice at his new firm: when someone was fired, the manager who fired him would contact the fired employee and meet with him in person at least two times in the following year. When he had to do this, very soon after being hired, it was excruciatingly difficult—the first time. After his experience of reaching out to fired employees as a human being, this manager says he will continue this practice even if he moves to another company. It affects the way he fires workers, but it also affects the way he hires and manages his workers. Embody your principles in practices.

The third piece of advice is that this challenge is social.  Find a community of business executives who are struggling to do things differently, and meet with them, be accountable to them. Support and challenge one another. Find out who is doing what you are trying to do, and take them to lunch. Encourage young mentees to seek out work with companies which are trying to be good, and to work under those bosses who embody these values and bear the scars of these struggles. 

One final point: Sometimes change must come at the level of government, at a high level. But if you think of society purely from the perspective of a government regulator, or if you see the economy purely from the perspective of an abstract model, you will also miss how changes can emerge from the initiatives and struggles of those at local levels.  No one in the homeschooling movement was trying to change the education system, but they have made a difference. The government did not bring about workplace innovations of flex time, the franchises of McDonalds and ChikFilA. Important institutional changes emerge from the social order; they do not always have to be imposed from above. They are the results of entrepreneurial adjustment to changing circumstances, changing views of what is and is not important.

We should not minimize the reality of competitive pressures, and the difficult choices facing the business owner.  Neither ought we to maximize the reality of competitive markets, either: many markets are less than perfectly competitive, and firm owners are not helpless in the face of competitive pressure.  Sometimes “the market made me do it” will be a copout.

We need to encourage our students not to be overly intimidated by the market.  Those of them who are entrepreneurial should be encouraged to add one more thing to their desire to start a business and make it a success; to make it a good, caring place for everyone involved.  The business world is a great place to let their desires to create run free, to the benefit of them, their workers, and their communities.