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Monday, November 24, 2014

Pope Francis Doesn't Really Understand This Economics Thing, Does He?

From Forbes
By Tim Worstall

Pope Francis has told us all that we’re really very naughty indeed to allow food to become a product like any other, a product in which people can speculate and profit. Which leads to a rather sad observation about Il Papa‘s understanding of basic economics: he doesn’t, essentially, he doesn’t understand basic economics. It is indeed an outrage that there are still 800 million or more of our fellow human beings who are malnourished. Appalling that while the world grows the calories to feed all not all get fed. But once we’ve noted those points, decided (as we damn well should) to do something about them, the interesting question becomes, well, what? At which point we might note that it’s the places with well functioning markets, subject to all that horrible speculation and profit making, that have the people who are not malnourished and not starving. Something Pope Francis might have considered before he said this


The 77-year old said the world had ‘paid too little heed to those who are hungry.’
While the number of undernourished people dropped by over half in the past two decades, 805 million people were still affected in 2014.
‘It is also painful to see the struggle against hunger and malnutrition hindered by ‘market priorities’, the ‘primacy of profit’, which reduce foodstuffs to a commodity like any other, subject to speculation and financial speculation in particular,’ Francis said.
Before I go further in arguing with this distinguished and holy man perhaps I should point out that I was brought up as a Catholic, indeed expensively educated in an attempt to turn me into a Catholic Gentleman (something that has obviously failed on both points), so I do understand the background to these remarks. There’s nothing unusual about them in the context of Catholic social teaching. However, they are still wrong: not in the goal, of course not, we all want the hungry to be fed. But in the understanding of the policies that are required to make this happen.

I’ve argued this so many times that the web is littered with pieces. Here, here and here just as examples.

But just to lay it out in very simple terms in one place. Regarding that first point, about profit. Profit is the incentive for people to do things. If people don’t profit from their actions then they won’t do them. Of course, we can take a wide view of what “profit” is: we could, for example, say that the warm feeling a farmer gets from watching a starving child eating the food he has grown is a profit. And it would be as well. But as we’ve found out over the past century or so (looking at those various attempts at the collectivisation of agriculture is really most instructive) that that good feeling of having produced what others need is not actually enough. Any and every society that has relied upon such public feelings has had extensive malnutrition if not out and out famine.

So, we want the producers of food to profit from their having produced it. Otherwise we just don’t get enough food.

Then on to speculation and financial speculation. These move the prices of things through time. This is also highly desirable (as Adam Smith pointed out 238 years ago) as by moving prices through time we also move supplies of food through time (see the linked pieces for this in more detail). We move food from, as Smith said, a time of plenty to a time of dearth: thus reducing malnutrition and starvation. And yes, again, the incentive for people to do this highly desirable thing is to make a profit.

So we actually want both profit and speculation in food. For the end results are desirable. We get both the production of food in the first place and the movement of it, in both geographic and temporal, terms, to where it is needed.

And thus the Pope is wrong in his condemnations.

That isn’t the end of the story though. It is still true that there are those malnourished, that there are still people starving. And also that we’ve a moral duty to do something about it. But if it’s not the greed for profits nor speculation that causes the problem then what is? At which point we can turn to another economist, Amartya Sen. Who has pointed out that, for the past century at least, starvation and famine have not been caused by an absence of food. They’re no longer supply side phenomena and they’ll not be solved by looking at that supply side.

No, instead, famine now is an absence of purchasing power among those who simply cannot buy the food that is available. This is such a well known matter that even George Bush, when President, tried to get the rules about US famine relief changed (Obama is trying again now, too, according to reports). Instead of shipping US grain to starving people ship US money to starving people so they can buy the food that is already there. Or if not exactly there, then nearby. And we can rely upon the existence of that effective demand to incentivise people through that profit motive, through speculation, to ship the food from where it is to where the hungry people are.

That is, modern hunger is a demand side phenomenon and will be solved by demand side measures. Like, as above, giving poor people money to buy food with.

This is what actually works, this is how most NGOs now see hunger, many governments too. The problem is not that there’s no food for the poor to buy. It’s that the poor have no money to buy food. The answer is thus not to fiddle around with the supply side, that’s working just fine. For there are supplies of food available. What’s going wrong is the demand side so that’s where the solution must lie. We must turn actual demand (empty bellies) into effective demand (people with empty bellies with money to buy the food that exists).

And that is where I really criticise the Pope. Yes, absolutely it is a Christian duty (and for those of us without faith, a moral one just as strong) to feed the starving and the hungry. But there are effective ways and ineffective ways to make this happen. And the Pope is putting forward an ineffective one, messing with the supply system of food. When the answer actually is messing with the demand for food: getting the poor the money they need to buy the food that exists. What really annoys is that most of the Catholic charities now know and acknowledge all of this. Why is the Pope so ill informed* on the matter then?
*Yes, a possible joke here on the infallibility of the Pope. But that does only extend to the Pope being infallible upon matters of doctrine. And as far as I can remember it has only been asserted once, that the assertion of the infallibility of the Pope when pronouncing upon doctrine is infallible. It most certainly doesn’t apply to economics any more than it insists that he gets the lottery numbers right every week.

  
 Tim Worstall's latest book is “23 Things We Are Telling You About Capitalism” At Amazon or Amazon UK. A critical (highly critical) re-appraisal of Ha Joon Chang’s “23 Things They Don’t Tell You About Capitalism”.



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