It's Time to Take Acton

August 21, 2015

The Acton Institute [1] isn’t even trying to hide its disdain for the message of Pope Francis anymore. Even though it can boast that its president and co-founder is a Catholic priest [2], the “free-market” think tank [3] [4] is now posting on its web site articles that are openly critical of the Holy Father’s call for social and economic justice. One such article is “Show Me the Way to Poverty [5],” by Dylan Pahman, a research fellow for the Acton Institute.

Mr. Pahman takes issue with a speech the pope gave last month [6] at the World Meeting of Popular Movements in Santa Cruz, Bolivia, which was organized in collaboration with the Pontifical Council for Justice and Peace and the Pontifical Academy of Social Sciences, wherein he called for a “globalization of hope, a hope which springs up from peoples and takes root among the poor,” which “must replace the globalization of exclusion and indifference!” Mr. Pahman objects that the pope’s “own solutions to the problems of the poor are difficult to differentiate from the same protectionist populism that has kept so many in poverty in Latin America for so long.”

This objection to “protectionist populism” reflects the common belief among advocates of so-called “free trade” “that history is on their side. After all, the defenders of free trade ask, isn’t free trade how all the world’s developed countries have become rich? What are some developing countries thinking, they wonder, when they refuse to adopt such a tried and tested recipe for economic development?” [7] 

But as University of Cambridge economist Ha-Joon Chang points out, the actual history of capitalism yields a different picture. The truth is that “when they were developing countries themselves, virtually all of today’s developed countries did not practice free trade (and laissez-faire industrial policy as its domestic counterpart). Rather, they promoted their national industries through tariffs, subsidies, and other measures. Particularly notable is the fact that the gap between ‘real’ and ‘imagined’ histories of trade policy is the greatest in relation to Britain and the United States, which are conventionally believed to have reached the top of the world’s economic hierarchy by adopting free trade when other countries were stuck with outdated mercantilist policies. These two countries were, in fact, often the pioneers and frequently the most ardent users of interventionist trade and industrial policy measures in their early stages of development.”

The history of the United States in this regard is particularly instructive. On December 5, 1791, the first U.S. treasury secretary, Alexander Hamilton, presented his Report on Manufactures [8] to the House of Representatives, wherein he argued for the development of manufacturing in the new nation. His recommendations would sound strange to those of us accustomed to hearing free trade advocated as the only sound way to prosperity. Specifically, those recommendations were: (1) protective duties on manufactured goods that could compete with domestic manufactures; (2) prohibitions on the import of manufactured goods also produced in the United States, provided there was sufficient domestic competition for the goods in question; (3) in rare cases, prohibiting the export of materials used in manufacturing to lessen their demand and keep their prices low; (4) subsidies to manufacturing concerns; (5) premiums in a small number of cases “to reward some particular excellence or superiority,” or “some extraordinary exertion or skill” in manufacturing; (6) exemption of some materials used in manufacturing from the imposition of duties; (7) imposing duties on the import of certain materials, for specific reasons, such as the existence of an abundant supply domestically; (8) extension of the same benefits to those who make improvements on inventions as to the inventors themselves; (9) inspection regulations to improve and maintain the quality of manufactured goods; (10) the introduction of bills of exchange which would be made negotiable throughout the United States, and (11) facilitation of the transport of commodities by means of infrastructure improvements. Certainly, Alexander Hamilton was no proponent of free trade.

While Congress did not adopt Hamilton’s idea of subsidies, it did adopt most of his proposal for tariffs. [9] The tariffs themselves were actually moderate. Hamilton didn’t want the tariffs to be so high that it would adversely impact the revenue to be derived from them. Thus, certain protectionist interests switched their allegiance from Hamilton’s Federalists to Jefferson’s Republicans. It seems that free trade ideology was in short supply during the first years of our republic.

Hamilton’s program “was developed in the next generation by Henry Clay, under the name of ‘the American System,’ and implemented under Clay’s disciple and admirer Abraham Lincoln and his successors during the period between the 1860s and the 1940s, when the US became the planet’s leading manufacturing economy behind a high wall of tariffs.” [10] “Henry Clay’s ‘American System,’ devised in the burst of nationalism that followed the War of 1812, remains one of the most historically significant examples of a government-sponsored program to harmonize and balance the nation's agriculture, commerce, and industry. This ‘System’ consisted of three mutually reenforcing parts: a tariff to protect and promote American industry; a national bank to foster commerce; and federal subsidies for roads, canals, and other ‘internal improvements’ to develop profitable markets for agriculture. Funds for these subsidies would be obtained from tariffs and sales of public lands. Clay argued that a vigorously maintained system of sectional economic interdependence would eliminate the chance of renewed subservience to the free-trade, laissez-faire ‘British System.’” [11]

That free-trade British System came into being only when Britain’s international edge in technology allowed it. [12] Still, even with its technological lead, Britain had “policies of industrial promotion until the mid-nineteenth century,” and “had very high tariffs on manufacturing products even as late as the 1820s, some two generations after the start of its Industrial Revolution.” It “was only after 1860 that most tariffs were abolished.” But this policy couldn’t last for long. Its era of free trade came to an end “when Britain finally acknowledged that it had lost its manufacturing eminence and re-introduced tariffs on a large scale in 1932.”

The history of the United States is similar. As Ha-Joon Chang tells us, “It was only after the Second World War, with its industrial supremacy unchallenged, that the U.S. liberalized its trade (although not as unequivocally as Britain did in the mid-nineteenth century) and started championing the cause of free trade….”

But why would a country champion the cause of free trade, when it is clear that it achieved its industrial ascendancy by other means? Dr. Chang quotes the nineteenth century German economist Friedrich List for the answer:

“‘It is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him. In this lies the secret of the cosmopolitical doctrine of Adam Smith, and of the cosmopolitical tendencies of his great contemporary William Pitt, and of all his successors in the British Government administrations.

“‘Any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and her navigation to such a degree of development that no other nation can sustain free competition with her, can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she has hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth.’”   

Of course, instead of hand-wringing about the error of previous protectionist policies, it is, perhaps, even more effective to simply engage in revisionist history, and claim that American economic success was born of a free trade policy from the beginning. The maxim of too many nowadays is: if the truth doesn’t support your case, lie.

Now if protectionist policies so successfully furthered industrial development in the United States and Britain, it stands to reason that similar policies would prove useful to developing countries today. Unfortunately, this doesn’t appear to be the view of the International Monetary Fund (IMF) and the World Bank, which often condition their loans on rapid market liberalization. [13]

When Stephen Byers was the leader of the United Kingdom delegation to the 1999 World Trade Organization ministerial conference in Seattle, he “was convinced that the expansion of world trade had the potential to bring major benefits to developing countries and would be one of the key means by which world poverty would be tackled.” In order to achieve this he “believed that developing countries would need to embrace trade liberalisation. This would mean opening up their own domestic markets to international competition. The thinking behind this approach being that the discipline of the market would resolve problems of underperformance, a strong economy would emerge and that, as a result, the poor would benefit.”

Mr. Byers now believes “that this approach is wrong and misguided,” having since “had the opportunity to see at first hand the consequences of trade policy.” His experience has led him to conclude “that full trade liberalisation is not the way forward. A different approach is needed: one which recognises the importance of managing trade with the objective of achieving development goals.”

When it comes to developing countries, free trade tends not to work very well. Mr. Byers provides some examples:

“Taiwan and South Korea are often held out as being good illustrations of the benefits of trade liberalisation. In fact, they built their international trading strength on the foundations of government subsidies and heavy investment in infrastructure and skills development while being protected from competition by overseas firms.

“In more recent years, those countries which have been able to reduce levels of poverty by increasing economic growth - like China, Vietnam, India and Mozambique - have all had high levels of intervention as part of an overall policy of strengthening domestic sectors.”

“On the other hand, there are an increasing number of countries in which full-scale trade liberalisation has been applied and then failed to deliver economic growth while allowing domestic markets to be dominated by imports. This often has devastating effects.

“Zambia and Ghana are both examples of countries in which the opening up of markets has led to sudden falls in rates of growth with sectors being unable to compete with foreign goods. Even in those countries that have experienced overall economic growth as a result of trade liberalisation, poverty has not necessarily been reduced.

“In Mexico during the first half of the 1990s there was economic growth, yet the number of people living below the poverty line increased by 14 million in the 10 years from the mid-1980s. This was due to the fact that the benefits of a more open market all went to the large commercial operators, with the small concerns being squeezed out.

“The evidence shows that the benefits that would flow from increased international trade will not materialise if markets are simply left alone. When this happens, liberalisation is used by the rich and powerful international players to make quick gains from short-term investments.”

Pope Francis in his speech to the World Meeting of Popular Movements spelled out what is really causing so many in Latin America to remain in poverty:

Photo by Casa Rosada
“The new colonialism takes on different faces. At times it appears as the anonymous influence of mammon: corporations, loan agencies, certain ‘free trade’ treaties, and the imposition of measures of ‘austerity’ which always tighten the belt of workers and the poor. The bishops of Latin America denounce this with utter clarity in the Aparecida Document, stating that ‘financial institutions and transnational companies are becoming stronger to the point that local economies are subordinated, especially weakening the local states, which seem ever more powerless to carry out development projects in the service of their populations’.”

The free trade dogma which is so ardently advocated by the Acton Institute, has proven ineffectual in dealing with poverty in the developing world. Indeed, given the history of how first-world countries, like the United States, rose to economic prominence, it is difficult to see how the strategy cannot be viewed as, on the part of some, a cynical attempt to kick away the ladder as described by Friedrich List.  

But Dylan Pahman will have none of this. He insists that business, “credit, trade, and fiscal responsibility are marks of healthy economies, not the problem, popular as it may be to denounce them.” Regardless of how popular it may or may not be to denounce these things, it is clear that Mr. Pahman is missing the point. The problem lies in the fact that financial institutions and transnational companies subordinate local economies to the prejudice of local populations. Credit and trade may be a sign of healthy first world economies, but they are of no assistance to developing economies to the extent they remain the agents of the first world.

Mr. Pahman’s false equivalence between austerity and fiscal responsibility is also remarkable. Austerity in a developing economy simply isn’t fiscally responsible. The fact is, austerity is already being imposed by the IMF and World Bank on third world countries with deleterious effects. As Anup Shah, who writes at the Global Issues site [14] points out:

“Many developing nations are in debt and poverty partly due to the policies of international institutions such as the International Monetary Fund (IMF) and the World Bank.

“Their programs have been heavily criticized for many years for resulting in poverty. In addition, for developing or third world countries, there has been an increased dependency on the richer nations. This is despite the IMF and World Bank’s claim that they will reduce poverty.

“Following an ideology known as neoliberalism, and spearheaded by these and other institutions known as the ‘Washington Consensus’ (for being based in Washington D.C.), Structural Adjustment Policies (SAPs) have been imposed to ensure debt repayment and economic restructuring. But the way it has happened has required poor countries to reduce spending on things like health, education and development, while debt repayment and other economic policies have been made the priority. In effect, the IMF and World Bank have demanded that poor nations lower the standard of living of their people.”

Even in developed countries austerity can have unintended consequences if improperly applied. Adam Posen, president of the Peterson Institute for International Economics, writes about austerity measures imposed to rectify the banking crisis in the euro zone:

“Austerity in Europe, however, didn't just address the wrong problem – it also worsened the problem it was meant to address, government debt. When you raise taxes or cut government spending, it is meant to close the gap between revenues and expenditures. But a national government isn't the same as a household. When it cuts spending or raises taxes it also cuts growth of the economy, which right away increases spending (on things like unemployment insurance) and decreases revenues (because people have lower income and pay less taxes). The net impact on deficits between these two effects depends on the situation.

“As some of us predicted, the euro area crisis was exactly the wrong situation for austerity to produce lower deficits. In a recession, the impact on growth of austerity is much bigger than in normal times; ditto for when a country's banks are damaged. And when your neighbors cut back at the same time as you do, the growth effect gets reinforced, especially if you trade with them a lot (which the euro area members do). Throw in the fact that the European Central Bank didn't loosen credit enough to offset the fiscal contraction, unlike the Federal Reserve, and you have a recipe for austerity producing increased public debt.

“And that is precisely what has happened. So the euro area governments are right to back off on austerity, to keep both their public- and private-sector debts from rising. They need a new approach to their problems.” [15]

Austerity makes recessionary conditions worse in places like the United States or Europe, and they hinder development and exacerbate poverty in third world countries. Mr. Pahman’s apparent belief that austerity is simply the equivalent of fiscal responsibility is astounding.

Mr. Pahman must be credited with the confidence he has in is views, so it must be wondered why he feels the need to sink to bearing false witness against Pope Francis. He actually says that “more important than the plight of the poor, to His Holiness, is the plight of trees, water, and lower animals,” and refers to this alleged conviction as “moral confusion”.

One struggles to find the part of the Pontiff’s address to the World Meeting of Popular Movements where he articulates such a belief, but the closest is this one:

“The third task, perhaps the most important facing us today, is to defend Mother Earth.

“Our common home is being pillaged, laid waste and harmed with impunity. Cowardice in defending it is a grave sin. We see with growing disappointment how one international summit after another takes place without any significant result. There exists a clear, definite and pressing ethical imperative to implement what has not yet been done. We cannot allow certain interests – interests which are global but not universal – to take over, to dominate states and international organizations, and to continue destroying creation. People and their movements are called to cry out, to mobilize and to demand – peacefully, but firmly – that appropriate and urgently-needed measures be taken. I ask you, in the name of God, to defend Mother Earth. I have duly addressed this issue in my Encyclical Letter Laudato Si’.”

Now no one can give that portion of the Holy Father’s speech a fair reading and come away with the idea that “the plight of trees, water, and lower animals,” is more important to the Pontiff than the plight of the poor, Mr. Pahman’s puerile interpretation notwithstanding. Indeed, environmental destruction is a critically important aspect of the plight of the poor. The poor cannot raise themselves from their condition if their environment is destroyed.

Mr. Pahman makes a comparison between the ranking of countries on the United Nation’s Human Development Index (HDI) [16] and their ranking on the Heritage Foundation’s Index of Economic Freedom [17], and points out that “of the top 20 countries on the most recent HDI ranking, 18 also rank as ‘free’ or ‘mostly free’ on the most recent Heritage Index of Economic Freedom.” That may seem impressive, but there is an inherent ambiguity in the Heritage Foundation’s index. As Stefan Karlsson, of the Mises Institute no less, points out:

“Clearly there is a great difference between the degree of economic freedom in the traditional capitalist bastion of Hong Kong and in Stalinist North Korea. But beyond such clear-cut cases how do we determine which countries are the most free and the least free?

“This is not an easy question because often it is not as clear as the comparison between Hong Kong and North Korea, where Hong Kong is arguably much freer in all aspects. Often it is the case that one country is freer in one aspect while being less free in another.” [18]

It thus appears that economic freedom, as such, is not easily susceptible of the quantification attempted by the Heritage Foundation. In this light the correlation that has been constructed takes on an artificial ambience.

What’s more, it has already been seen how free trade policies are favored by countries who have reached a certain level of development. One supposes that the United States would have scored lower on the Heritage Foundation’s index in the days when the American system of economics was operative. But that was the period when the United States became the leading manufacturing country in the world. That fact undermines any notion that economic freedom as understood by the Heritage Institute has any causal relationship to a nation’s prosperity. Instead, as has already been discussed, it appears that free trade policies emerge as nations become prosperous. It is, therefore, not surprising that there is some correlation between HDI rankings and those of the Heritage Foundation’s index, but it is for the opposite reason that Mr. Pahman claims.

Mr. Pahman objects that Pope Francis is speaking outside of his competence. He says that it “is one thing to call attention to the moral roots of economic problems; it is another to pass judgment upon which prudential policies are the best means to moral ends.” Pope Francis, he says, should follow the example of Saint Pope John Paul II, who, he says, spoke more favorably of a “free economy” (apparently that was within his competence, since he spoke more “cautiously”). But Saint Pope John Paul II didn’t offer the aid and comfort to the Acton Institute that Mr. Pahman hopes for.

In the encyclical Centesimus Annus, in a part only partially quoted by Mr. Pahman, Saint John Paul II said this:

“Returning now to the initial question: can it perhaps be said that, after the failure of Communism, capitalism is the victorious social system, and that capitalism should be the goal of the countries now making efforts to rebuild their economy and society? Is this the model which ought to be proposed to the countries of the Third World which are searching for the path to true economic and civil progress?

“The answer is obviously complex. If by ‘capitalism’ is meant an economic system which recognizes the fundamental and positive role of business, the market, private property and the resulting responsibility for the means of production, as well as free human creativity in the economic sector, then the answer is certainly in the affirmative, even though it would perhaps be more appropriate to speak of a ‘business economy’, ‘market economy’ or simply ‘free economy’. But if by ‘capitalism’ is meant a system in which freedom in the economic sector is not circumscribed within a strong juridical framework which places it at the service of human freedom in its totality, and which sees it as a particular aspect of that freedom, the core of which is ethical and religious, then the reply is certainly negative.

“The Marxist solution has failed, but the realities of marginalization and exploitation remain in the world, especially the Third World, as does the reality of human alienation, especially in the more advanced countries. Against these phenomena the Church strongly raises her voice. Vast multitudes are still living in conditions of great material and moral poverty. The collapse of the Communist system in so many countries certainly removes an obstacle to facing these problems in an appropriate and realistic way, but it is not enough to bring about their solution. Indeed, there is a risk that a radical capitalistic ideology could spread which refuses even to consider these problems, in the a priori belief that any attempt to solve them is doomed to failure, and which blindly entrusts their solution to the free development of market forces.” [19]

Mr. Pahman misrepresents the “affirmative” answer Saint Pope John Paul II as unqualified, even if made “cautiously,” and ignores the Pontiff’s concerns about the marginalization and exploitation that remains in the world, particularly in the third world. It is interesting that the Pontiff used the term “free economy” to distinguish what he has in mind from “capitalism,” whereas Mr. Pahman confounds the terms. But what Saint Pope John Paul II had in mind was “a society of free work, of enterprise and of participation,” a society “not directed against the market, but” which “demands that the market be appropriately controlled by the forces of society and by the State, so as to guarantee that the basic needs of the whole of society are satisfied.”

It is true that Saint John Paul II said that it “would appear that, on the level of individual nations and of international relations, the free market is the most efficient instrument for utilizing resources and effectively responding to needs.” But he went on to say that “this is true only for those needs which are ‘solvent’, insofar as they are endowed with purchasing power, and for those resources which are ‘marketable’, insofar as they are capable of obtaining a satisfactory price. But there are many human needs which find no place on the market. It is a strict duty of justice and truth not to allow fundamental human needs to remain unsatisfied, and not to allow those burdened by such needs to perish. It is also necessary to help these needy people to acquire expertise, to enter the circle of exchange, and to develop their skills in order to make the best use of their capacities and resources. Even prior to the logic of a fair exchange of goods and the forms of justice appropriate to it, there exists something which is due to man because he is man, by reason of his lofty dignity. Inseparable from that required ‘something’ is the possibility to survive and, at the same time, to make an active contribution to the common good of humanity.”

It is a mockery to insist that there are resources available to developing countries when they cannot purchase them. The market works only when the parties to exchanges are in relatively equal positions. This is not the case where the IMF and the World Bank can impose draconian terms in connection with loans. This is not the case where the resources of developing countries can be exploited to the profit of transnational corporations, all the while denying them the means to develop their own economies. Partisans of free trade, like the Acton Institute, deny these obvious realities.

One aspect of Mr. Pahman’s article represents a positive development. His attack on Pope Francis should make it clear that there is little affinity between Catholic Social Teaching and the positions of the Acton Institute. Due to the presence of a Catholic priest at the helm of the organization, some have been confused on that point. There should be no confusion now.

Jack Quirk