Warren Buffett and Pope Benedict: Soulmates?
Maybe not on everything, but some say they preach the same [socialist] economic gospel — that the wealthy should shoulder more or society’s economic burdens, as Buffett put it in a recent Times Op-Ed — and that they’re “both dead wrong,” according to The Hoover Institution’s Richard Epstein:
The Pope was on his way to recession-torn Spain—to lead the Roman Catholic Church’s weeklong celebration of World Youth Day—when he denounced those nameless persons who put “profits before people.” He told journalists, “The economy cannot be measured by the maximum profit but by the common good. The economy cannot function only with mercantile self-regulation but needs an ethical reason in order to work for man.” Standing alone, these words mirror the refrains of countless Spanish socialists, whose relations with the Pope have soured in recent years. Their shared premises help explain why Spain finds itself in such a sorry state.
Denouncing those who put ‘profits before people’ may stir the masses, but it is a wickedly deformed foundation for social policy. Profits, like losses, do not exist in the abstract. Corporations, as such, do not experience gains or losses. Those gains and losses are passed on to real people, like shareholders, consumers, workers, and suppliers. It is possible to imagine a world without profits. Yet the disappearance of profits means that investors will be unable to realize a return on either their capital or labor. Structure a system that puts people before profits, and both capital and labor will dry up. The scarcity of private investment capital will force the public sector to first raise and allocate capital and labor, though it has no idea how these resources should be deployed to help the people, writ large. A set of ill-conceived public investments will not provide useful goods and services for consumers (who are, after all, people), nor will it provide sustainable wages for workers (who are also people). Poor investment decisions will lead to a massive constriction in social output that harms all people equally.
The proper response to these difficulties is to treat profits as an accurate measure of the cost of capital, rewarded to those individuals and firms who supply some desirable mix of goods, services, and jobs that people, acting individually and not collectively, want for themselves. The genius of Adam Smith, whose musings on the invisible hand are too often derided, was to realize that private markets (supported, to be sure, by suitable public infrastructure) will do better than a command and control system in satisfying the individual’s wants and needs.
The Pope offers no serious answer to Smith’s point when he talks about “the ethical need to work for man” and the “common good.” In both of these cases, he treats a collection of diverse individuals as though they form part of some harmonious whole. “Man” in the Pope’s formulation is a grammatical singular but a social collective. The “common good” speaks of some aggregate benefit to a community that is not securely tethered to the successes and failures of the particular individuals within the collectivity.