By:Chronicles | January 22, 2010
Next we must look at another rhetorical device of Woods which serves to distract the attention of the reader from the point at issue and to prejudice him against what I actually wrote. Woods mentions the interventions of bishops’ conferences into economic matters. As a matter of fact I said absolutely nothing in my article about bishops nor do I want to go into the complicated question of their competence in the matter, except to say that it clearly is not the same as that of the popes. Now what does Woods say? “Now if a bishops’ conference proposes an intervention whose promised results cannot occur because it takes no heed of these restraints, we have precisely the problem I identified in my book The Church and the Market: A Catholic Defense of the Free Economy (2005) and that Storck either ignores or thinks cannot arise: a faulty grasp of economic theory . . . leads in turn to ill-considered economic proposals that will have the opposite of their intended effect. It is obviously within the realm of possibility that such a thing could occur, and in my own work I have suggested that it in fact has occurred: the advice of the American bishops on the economy has been distinctly unhelpful.” Woods invokes the spectacle of the American bishops pronouncing on the economy because he knows that most of his readers will have a poor opinion of recent episcopal interventions on such matters. But this is nothing but an attempt to distract his readers’ attention from the question at issue which does not concern bishops conferences, but the right of the Church, through her supreme authority on earth, to teach in this area. As a matter of fact, one of the respondents in the symposium that Woods himself chose, Emil Berendt, finds it curious that Woods brings up bishops conferences, calling it “a bit of murkiness in this exchange” and noting that “Storck limits his observations to papal teaching” but “Woods extrapolates Storck’s comments to pronouncements of local conferences of bishops.” (In fact, I highly recommend Dr. Berendt’s reply as a perceptive and fair evaluation of my exchange with Dr. Woods from someone who was apparently Wood’s own choice.)
After several paragraphs in this vein, Woods comes to another point. He writes: “According to Storck, Catholic social teaching `must necessarily make use of some type of economic analysis.’ Presumably, though, Catholic social teaching could simply instruct the faithful in general moral principles that should guide them in the marketplace: simple honesty and generosity, for instance, and an insistence on mutual consent (i.e., the other partner in your transaction is also a human being with rights, not a resource to be exploited for your selfish benefit).” In doing so, Woods would reduce Catholic social teaching to mere platitudes. For example, what is “simple honesty and generosity”? Must one reveal a hidden defect in an item he is trying to sell? Does generosity require that one sell an item for less than it is worth? When does a lack of generosity become a mortal sin? None of these questions are answered in the type of social teaching that Woods apparently recommends. And can we imagine what Catholic teaching on sexuality would become if it recommended “simple honesty and generosity . . . and an insistence on mutual consent”? Make sure you tell your partner whether you’re on the pill or not, be generous in going along, and of course, whatever mutually consenting adults want is ok. The Catholic Church lives in the real world of men and is not afraid to apply her intellect to the genuine issues and problems that confront us. That is why her teaching on any moral subject cannot be easily reduced to the simple platitudes that Woods wants.
After this, Woods reverts to the question we have already touched on and asks “how can empirical judgments, which are far removed from faith and morals, be the legitimate province of the popes?” Of course, true empirical judgments in papal social teaching do not enjoy the same status as their moral judgments. For example, when Pope Pius XI wrote in Quadragesimo Anno that “’capital’ has undoubtedly long been able to appropriate too much to itself,” this statement, as an historical judgment, cannot enjoy the same status as his subsequent dictum that capital ought not to appropriate too much to itself and that workers deserve a living wage. But if we were to take Woods’ approach to its logical conclusion, we would have to deny the right of popes to make any empirical statement, even about the most obvious things. When a pope denounces in an encyclical the persecution of the Church in some nation, for example, are we to reply that they have no business making such judgments: that is the province of political scientists and historians—or maybe of journalists! To Leo XIII, Pius XI, John Paul II and other popes it seemed obvious that in the nineteenth century the worker was oppressed. I suppose someone could deny that if he really wanted to without being a dissenter. But what one cannot deny without being a dissenter is that economic oppression is possible and is wrong and cannot be explained away as the inevitable workings of what pose as economic laws.
Then Woods turns to a favorite subject of his, the distinctiveness of Austrian economics and the unfairness of lumping it with mainstream neoclassical economics. He writes, “Storck never describes his own brand of economics in much detail, but we do learn that it ‘does not approximate as much as some might like to the natural sciences.’” And yes, it is true that Austrian economists do not employ mathematics and other methodologies of the natural sciences as do mainstream economists. But what I was objecting to, and what I continue to object to, is primarily what I call the deductive nature of both schools of economics, i.e., the notion that we can create some kind of model from which we can deduce economic behavior, rather than primarily examining what particular economic behavior has actually occurred. And Woods, thankfully, provides me with a perfect example of the deductive approach in action in his discussion of CEO salaries. Incidentally this is another example of Woods’ attempt to snow the reader by his citation of many learned books and articles.
In my paper, then, I criticize Paul Samuelson’s discussion of wage determination solely by the forces of supply and demand, pointing how that in recent years CEOs of failing corporations have received large salaries, bonuses and other rewards even as their companies were going into bankruptcy or otherwise performing poorly. In support of this I cite among other sources a Business Week article, which explains that the compensation of such CEOs is set by colleagues on the board of directors and has nothing to do with market forces. Now how does Woods respond to this? He writes, “Here Storck relies on the old Berle-Means thesis from 1932, which referred to a supposed problem—separation of ownership and control (what we now call a principal-agent problem)—in corporate governance. The argument is that while the owners, or stockholders, want the firm to be as profitable as possible, management is more interested in posh benefits, perks, and other such rewards that benefit them but hurt the firm. . . . A difficulty for Storck’s argument is that much work has been done on the subject of corporate control since 1932, when Adolph Berle and Gardiner Means articulated Storck’s point in The Modern Corporation and Private Property. Storck makes no reference to the important work of Henry Manne, whose 1965 article ‘Mergers and the Market for Corporate Control’ began a sustained reconsideration of the Berle-Means thesis.” I do indeed plead guilty. I have not read the important 1965 article by Henry Manne. But I simply ask the question: can a 1965 article somehow show that certain behavior that occurred in the last ten or fifteen years really did not occur? The CEOs either behaved in a certain way or they did not. It is no good to claim that they could not have behaved that way because Henry Manne, thirty or more years ago, made an argument that they couldn’t. Did Woods really read what I, or rather the news articles I quoted, said? For example, about Michael Eisner of Disney who “after he failed to clear his bonus hurdle two years running, his board lowered the performance bar, and then . . . he finally cleared it. An Olympian effort worth $5 million.” Woods might want to explain this away based on some theory he has read somewhere, but most people look at it and can recognize the truth: This is nothing but crony capitalism at its worst and puts in question the ability of the law of supply and demand to explain all economic behavior, and in particular the setting of wages and salaries.
But this brings up the larger topic of the place of power in economic relations. In my article I make the point that Leo XIII and Pius XI assume that those with economic power often oppress those without economic power and that this oppression shows up in particular in determination of wages. Woods begins, “Storck is correct to observe that what he calls a power relationship in differential bargaining positions can affect the price of something, but he is not saying anything economists do not already know. . . . In the case of bilateral monopoly, for instance, the price is necessarily determined by bargaining, and where the price ultimately comes to rest depends on a variety of factors, including the actors’ respective bargaining skills, the strength of their bargaining positions, and so on.” But if this is so well-known among economists, then why does their analysis of wages seem to ignore this? Pope Leo, for example, recognized that if “through necessity or fear of a worse evil the workman accept harder conditions [than a just wage] because an employer or contractor will afford him no better, he is made the victim of force and injustice.” So does Dr. Woods now accept this? Does he recognize that unequal bargaining positions can cause outcomes contrary to justice and that someone, either a union or some other kind of subsidiary body or even the state itself (as Pope Leo in some cases allowed) must step in to correct that lack of bargaining balance? Or is the unequal “strength of their bargaining positions” simply a fact of life that we must live with? And what about their probably unequal “bargaining skills?” Such inequality is probably present in most cases of bargaining, given the vast differences among human beings in their intellects and skills. Were we not exhorted previously to observe “simple honesty and generosity . . . and an insistence on mutual consent”? But if bargainers are unequal, their consent is not necessarily really mutual, despite appearances. But no, Thomas Woods does not think workers are exploited. For he continues. “Non-economists have often made the more general claim that business, because it is said to be in a stronger bargaining position than labor, can negotiate unjustly low wages, and that wages can be determined anywhere along a lengthy zone of indeterminacy. Labor economist Charles Baird describes this common view as ‘a hoary myth.’ For one thing, ever since the introduction of the automobile the average worker has had countless employment choices, and the more choices laborers have, the less ‘power’ potential employers exercise over them, since the narrower is the zone of indeterminacy. Second, if business really could bring about abnormally low wages, then labor-intensive businesses, where this wicked exploitation should yield additional profit, should be more profitable than more capital-intensive businesses—but no evidence exists to support this contention. And if wage determination really were this arbitrary, there would be no reason for skilled workers to earn a premium over unskilled workers. Firms could pay them both the same pittance.” Again we have theory over practice and again irrelevancies designed to distract the reader. Has Woods bothered to check on what wages are actually being paid? Do the figures largely showing wage stagnation accompanied by productivity increases mean anything to him? But no, he read an article or a book somewhere that shows how such things are not possible—therefore they are not possible. There is no exploitation, it is surely an impossibility. No sensible critic of free-market capitalism, even if he is a “non-economist,” thinks “that wages can be determined anywhere along a lengthy zone of indeterminacy” by businesses. Of course there are constraints on the behavior of every economic actor. But to anyone who thinks that businesses do not often succeed in driving wages down, all I can suggest is to spend less time looking at deductive economic arguments and more time looking at wage statistics.
After this Woods looks at one of the historical examples of actual economic activity I discuss in my paper, the efforts of two Catholic priests in Nova Scotia in the 1930’s to free the poverty-stricken fishermen from the control of middlemen who were absorbing most of the profits from the sale of the fish and leaving a pittance for the actual fishermen. Briefly, the priests formed study groups and helped set up cooperatives so that the fishermen themselves learned to send their product directly to market and avoid the middlemen altogether. This shows, I argued, that those who hold the determining position of economic power reap the rewards and that there is no economic law which dictates who must be in that position of power. Woods’ response to this is simply bizarre. “The truth is exactly the opposite. This is precisely how the market works: such differences in prices are arbitraged away. This isn’t so much a case of cutting out the middleman as it is an example of people’s natural inclination to arbitrage.” But there was absolutely nothing of the market in this: Two priests who had studied and attempted to implement the papal social doctrine that Dr. Woods belittles managed to organize fishermen to take control of their economic situation. This is not market activity, unless you would want to call things such as union organizing a form of market activity. This is an example of the solidarity that John Paul II often spoke of and which applies to the realm of economics just as it does in other areas of life and incidentally is a further confirmation of the important role that power plays in determining economic outcomes. No automatic economic law drove the priests to study papal social teaching or the fishermen to form study groups and cooperatives. And the laws of economics functioned just as well with the fishermen in control of their product as they had with the middlemen holding the reins of power. This is how economies work in the real world.