Financial scandals these days are like buses: another one comes along every minute. The ripples from Libor have not yet settled, but now the Serious Fraud Office has launched a criminal investigation into allegations about rigging of the £3 trillion-a-day foreign exchange markets by traders at City banks. For all those critics denouncing the evils of capitalism, this is grist to their mill.
The critics have now apparently been joined by the Pope and that is something no supporter of free-market capitalism can shrug off. The world’s 1.2 billion Catholics may not be conspicuously obedient to the pontiff on matters such as artificial contraception, but when he denounces the greed of the rich before an audience largely drawn from the developing world and the poorer elements within developed nations, he will strike a sympathetic chord. That is not a constituency that capitalism, currently discredited by the banking debacle and urgently needing to reinvent itself morally, can afford to alienate.
Much of this confrontation between Catholicism and Capitalism is more impressionistic than substantial; but there is a core conflict. This was camouflaged during the second half of the 20th century when Pius XII encouraged pro-capitalist Christian Democrat parties to combat communism and John Paul II played a key role in bringing down the Soviet Union. Now, relieved of its preoccupation with opposing the heirs of the Russian Revolution, the Catholic Church is once more confronting the materialist legacy of the French Revolution, from which it was distracted between 1917 and 1989.
Modern Catholic social teaching derives from Rerum Novarum, the famous social encyclical of Leo XIII in 1891. Balance of rights, as its English title – ‘Rights and Duties of Capital and Labour’ – demonstrated, is the essence of the Church’s stance. The unequivocal assertion of the right to private property in that encyclical and its rejection of the Marxist concept of class struggle clearly placed the Catholic Church in opposition to socialism, a position it has retained since, apart from the extremist minority of ‘liberation theologians’ based largely in Latin America in the 1960s and 1970s, whose Marxist ideas were condemned by the Church – including the then local Jesuit superior Jorge Bergoglio, now the Pope.
But Pope Francis’s apostolic exhortation Evangelii Gaudium has alarmed and antagonised free-marketeers. On analysis, it is not so socialist as they assume, but neither does it appear fully to reflect market realities. The Pope’s condemnation of “an economy of exclusion” echoes the concerns of many secular commentators who see recession ending, but many people even in Europe failing to benefit from recovery. His claim that society is enslaved to “the idolatry of money” rings all too true and is a longstanding theme of the Church; he even cites “the ancient golden calf” of scripture.
People who are concerned about rampant materialism and the impersonal forces of globalisation will share these misgivings. But when the Pope denounces as false “trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world”, he enters the realm of academic controversy to defend a dubious thesis. His critics were not slow to respond with a mass of socio-economic statistics, pre-eminently the fact that capitalism brought 1 billion people out of poverty in 30 years.
The Catholic Church has been cited here as a high-profile critic of contemporary capitalism. Yet many of the concerns it voices are shared by large swathes of the world population, so that capitalism faces an intellectual and moral challenge to justify itself. Its first task is to put its house in order. Investigations such as the forex inquiry must be exhaustive and reinforced by punitive sanctions. But the alleged activities are already criminal: they no more invalidate the existence of capitalism than burglary discredits the merits of home ownership.
There is an urgent need for effective regulation, the lack of which contributed so evidently to the banking crisis. Corporate governance, in particular, must be put under severe scrutiny. Reform needs to be energised by a positive drive to make capitalism not only compatible with social morality, but an active expression of it. Ethical capitalism is now high up the agenda; it is an annual topic at Davos, but the challenge is to convert theory into practice.
That practice should not entail diluting capitalism with socialism. The ultimate cause of the sub-prime crisis in the United States, which triggered the banking crisis, was the Clinton presidency’s initiation of a policy of compelling lenders to give mortgages to applicants from ‘minorities’ – most outrageously, a $500,000 home loan on the security of an unemployment benefit cheque. Latterly the Justice Department was enforcing this insanity on lenders such as Fannie Mae and Freddie Mac, with catastrophic consequences.
It is also crucial that those who aspire to reform capitalism diagnose the problem correctly. It is not, as many critics claim, ‘inequality’. It does not matter if an investor at the top of the heap increases his fortune from £1bn to £5bn, so long as millions at the bottom of the heap ascend the much shorter, but vital, distance from poverty to an eligible living standard. The contemporary cultural obsession with ‘equality’ is an inanity, a lingering legacy of defunct Marxism.
But it is not mindless egalitarianism to deplore massive bonuses being paid to reward failure, as has become regular practice. That is the negation of capitalism; it would have baffled and appalled any Victorian entrepreneur. Market practitioners and institutions need to rediscover the Victorian ethic of deferred gratification and abandon the short-termism that fuelled the financial crisis, as recommended by Professor John Kay’s report on UK equity markets.
Corporations exist to create profits – legally, responsibly and ethically. The trickle-down effect is real, no matter how far removed a successful investor may be from philanthropic intentions. The only way in which a rich man can prevent his wealth from trickling down through society is by stuffing it under the mattress and depriving himself of profits. Which is where capitalism comes in.