Introduction
The encyclicals with which Catholics identify modern Catholic social teaching, starting with Leo XIII’s Rerum novarum in 1891, examine questions related to what we might call political economy. Leo XIII, for instance, wrote of labour, capital, capitalism, socialism, private property and the like. And we can find these terms in the latest encyclicals promulgated by Pope Francis.
Yet this tradition seems silent on what has arguably become the most common form of political economy, which we can call crony capitalism or cronyism. This system is not the small-government, free-market ideal of classical liberals and many American conservatives. Nor is it the state socialism that dominated much of the world in the twentieth century and continues in North Korea and Cuba. At its core, cronyism is a form of collusion between the administrative state and large corporate actors. It involves a concentration of power between what we often call the “public” and “private” spheres.
In this chapter, we will consider what light Catholic social teaching can cast on cronyism, how the Holy See could respond to this informal political economy and whether is it well-positioned to do so.
Defining Cronyism
As an economic system, cronyism shares some features with twentieth century fascism. That term, however, now carries connotations of the dictatorships, racism, anti-Semitism and militarism of Fascist Italy, Spain, and Nazi Germany. It is less tendentious to describe these economic systems as “corporatist.” This is a form of consolidation among political and business entities, including industrial cartels and co-operatives. In theory, corporatism represents a hierarchical economy run by political, business and even ecclesiastical elites co-operating, they believe, for the common good. It need not involve a literal dictatorship, racial theory, or militarism—all features commonly associated with fascism.[1]
In the 20th century, many Catholic intellectuals and clerics supported corporatism as a supposed “third way” between liberal capitalism and socialism.[2] This is discussed further below.
Unlike corporatism, cronyism is not a political economic theory in its own right. It is, rather, what many modern economies evolve into because of incentives in both the political and economic spheres.
In a sense, the emerging Chinese system is a form of cronyism, with an especially powerful state. But an apparently more benign form is common in liberal democracies with vibrant markets, private businesses and low levels of criminal corruption. This may seem paradoxical to those who assume that private corporations always prefer to compete in a free market and so will oppose the regulatory state. In fact, cronyism would be no surprise to most champions of a free economy from Adam Smith in the 18th century, to Thomas Sowell in the 21st. All these thinkers treated cronyism as a perennial danger. That is because a private company, especially a large, unvirtuous one, may be only too happy to bear regulatory burdens, if those burdens disproportionately harm current and/or potential competitors.
Collusion and cartels among competitors to fix prices or supply are almost always illegal in modern economies. But cronyism may be legal. Indeed, retired regulators may have lucrative careers as lobbyists for private corporations, in part because they are experts in navigating the byzantine regulations that they previously wrote and enforced.
Economists call this classic cronyism “regulatory capture” (Dal Bo, 2006). This is how cronyism tends to start. In the late twentieth century, however, we began to witness the emergence of a new and more encompassing form. If classic cronyism involves co-operation or collusion between government and large business, full-spectrum cronyism adds non-profits and charities, cultural and media institutions, and transnational organisations such as the United Nations and the World Economic Forum.
Cronyism, then, does not look like the homogeneous socialism of the former Soviet Union, which radically curtailed private property and crowded out the private sphere with state-owned industry and agriculture and with a violent security and surveillance apparatus. In contrast, cronyism retains different institutional spheres, even as these spheres become an ever larger and more unitary machine of social control.[3]
Catholic social teaching says nothing explicitly about this cronyism, which makes our task difficult. There are, however, affinities between cronyism and corporatism which play a positive role in a few prominent social encyclicals. This requires us to ask an awkward question: how aware is the Holy See of the dangers of cronyism? Might its past and present lack of sensitivity to these dangers leave it susceptible to it?
As we will see, the principles of Catholic social teaching cast clarifying light on cronyism. To judge from recent events, however, the Holy See itself seems ill-prepared to deal with a political economy that does not fall into the typical categories of liberalism, capitalism, or socialism. In fact, decades of sympathy to corporatism might even lead some churchmen to see in cronyism a kindred system to be nurtured rather than challenged. There are some recent signs that the Holy See is far less prepared to deal with cronyism than it should be.
Catholic social teaching and economic models
Beginning with Pope Leo XIII’s 1891 Rerum novarum, the Church has sought to apply the perennial truths of natural law and the Catholic faith to concrete social conditions.
Some claim that, in Catholic social teaching, the Magisterium proposes a detailed political programme that constitutes a “third way” between capitalism and socialism.[4] And detailed claims in encyclicals about private property, unionisation, foreign aid, vocational guilds, and wage and employment policies, as well as critiques of socialism, capitalism, liberalism and “neo-liberalism” can be found.
This third way is often identified with either corporatism or distributism. Randall K. Morck and Bernard Yin Yeung, for instance, argue that “corporatism was Roman Catholic social doctrine from the 1890s to the 1960s” (Morck and Yin Yeung, 2010, page 2). Distributists such as Hilaire Belloc and G.K. Chesterton emphasise the widespread distribution of “productive property” and claim that their model either is, or at least is grounded in, Catholic social teaching. These thinkers, in other words, see Catholic social teaching as a specific economic model with specific economic policies.
This is not wholly implausible. Samuel Gregg argues that the corporatist vision makes an appearance in Rerum novarum (1891) and becomes central in Pius XI’s 1931 encyclical Quadragesimo anno. “Pius XI appears to go further than his predecessor”, Gregg writes, “in formally proposing what a social order derived from Catholic Social Teaching should look like.” (Gregg, 2019, page 102). His encyclical and others encouraged corporatism in Catholic social thought especially in the German world among Christian Democrats after World War II. Earlier, it had influenced the policies of regimes such as the Vichy in France, Spain under Franco, and as noted above, Mussolini’s Italy. It’s detectible in a number of Latin American countries as well.
On the other hand, John XXIII seemed to demote corporatism in Mater et magistra. And later encyclicals, especially Centesimus annus (1991), are more sympathetic to the market economy than to corporatism.
As a result, it would not be correct to identify corporatism unambiguously with the core principles of Catholic social teaching. Indeed, to identify either corporatism or distributism with Catholic social teaching is to contradict the principles of the tradition. In Centesimus annus (1991) St. John Paul II insisted that “the Church has no models to present” and that “the Christian faith does not presume to imprison changing sociopolitical realities in a rigid schema.” In his 1987 encyclical Sollicitudo rei socialis, he wrote, “The church’s social doctrine is not a ‘third way’ between liberal capitalism and Marxist collectivism…rather it constitutes a category of its own.”
For this reason, in 1986, the Congregation for the Doctrine of Faith (CDF) made clear that the relevant documents often include “contingent judgments” to be distinguished from the core of the Church’s social teaching. For example, in Instruction on Christian Freedom and Liberation (72), the CDF explained that the Church, “offers by her social doctrine a set of principles for reflection and criteria for judgment.”
Even without these statements from John Paul II and qualifications from the CDF, however, there is too much internal diversity among the documents to identify Catholic social teaching with corporatism or any single economic model.
Moreover, treating Catholic social teaching as a detailed political programme opens it up to devastating objections. It is not hard to find misguided factual and economic claims in the Catholic social teaching corpus. Philosopher John Finnis summarises such problems in a book chapter entitled “A Radical Critique of Catholic Social teaching” (Finnis, 2019, page 548). According to Finnis, Catholic social teaching interpreted in this way is:
impaired by (1) ambiguity about its scope or subject matter, (2) inattention to its dependence on judgments about empirical facts and likelihoods, and/or upon the other contingent factors and diverse but not unreasonable preferences inherent in any application of the Golden Rule, and (3) inappropriate assumptions that pastors have primary responsibility for making such judgments and assessments, and for deciding and choosing how the laity should act in line with them. Much (not all) of CST should be formulated hypothetically: if you judge that such and such facts obtain, or are likely, then (unless you judge that certain other facts do not obtain or are unlikely), true moral principles and norms, confirmed by divine revelation, direct that you should choose thus-and-thus.
If it were to propose a detailed political platform, Catholic social teaching would reduce to ephemeral attempts by popes to speak about subjects on which they have no special authority or expertise. It is no surprise that Finnis advises that churchmen get out of the business of offering such advice:
Popes and other bishops therefore should be little involved in it, beyond reminding everyone of those true principles and norms, in season and out. Their documents or preaching need not address CST more often than other matters of morality. Organs of the Holy See or bishops’ conferences dedicated to CST are unnecessary (Finnis, 2019, page 548).
One alternative that accounts for these difficulties is to recognise that the authoritative remit of Catholic social teaching is quite limited. Following the CDF guidance from 1986, we should see Catholic social teaching as a century-old tradition that seeks to apply perennial principles rooted in Catholic theology and the natural law to changing social and economic conditions. These are what Finnis (2019, page 548) refers to as “true moral principles and norms, confirmed by divine revelation” (p. 548).
Alas, there is no canonical list of these principles. But they include: the intrinsic dignity of the human person from conception to natural death; marriage and family as the fundamental units of society; the common good; subsidiarity; solidarity and human equality; reason and natural law; the dignity of work and of workers; the reality of human rights and responsibilities; the right to private property; and our stewardship of the natural world. These principles have a much greater command on the Catholic conscience, than do the various ways popes and Church officials have attempted to apply them.
Framing matters in this way has its own problems, of course. As we have noted, apostolic letters, encyclicals, and the like are rarely limited to abstract principles. They also contain scientific and economic assumptions and make claims based on those assumptions. This means we can and should distinguish non-negotiable questions of “faith and morals” (over which the Magisterium has divinely protected authority) from the prudential application of those questions, which are based on empirical observations and theoretical assumptions, not just normative principles. On these complex conjunctions of propositions, the Magisterium has no special protection, and thus can make mistakes.
Pope Francis wrote in Laudato Si (188), for instance, that “the Church does not presume to settle scientific questions or to replace politics”. Such a task is not delivered to us prepackaged by the Magisterium.
In dealing with cronyism, the role of the laity is important for three reasons. Firstly, the Holy See has offered little explicit reflection on this political form. Secondly, owing in part to the support for corporatism in some Catholic social teaching documents, the Holy See is arguably vulnerable to cronyism, with which corporatism shares a familial resemblance. And thirdly, applications of Catholic social teaching to political economy should be grounded in economic reality (Richards, 2020). No theory that ignores, for instance, the role of incentives or the relationship of supply and demand, or that fails to account for the role of prices in transmitting information, has much hope of promoting human flourishing. And any such attempt to reduce widespread poverty that ignores our knowledge of how to do so—through, for instance, the rule of law, property rights, economic freedom, and innovation—is at best deficient, if not harmful.
When he was the head of the Congregation for the Doctrine of the Faith, Joseph Ratzinger called for such an effort (Ratzinger, 1986, page 4):
A morality that believes itself able to dispense with the technical knowledge of economic laws is not morality but moralism. As such it is the antithesis of morality. A scientific approach that believes itself capable of managing without an ethos misunderstands the reality of man. Therefore, it is not scientific. Today we need a maximum of specialized economic understanding, but also a maximum of ethos so that specialized economic understanding may enter the service of the right goals.
Armed with economic knowledge, the principles of Catholic social teaching can help lay analysts think as Catholics about cronyism, and perhaps help the Holy See recognise this form of political economy for what it is.
Cronyism: how it starts
Cronyism may start with the best of intentions. Perhaps a thought experiment illustrates the point. Imagine a crisis in private banking leads to massive unemployment and bankruptcies. In liberal democracies, elected officials feel strong pressure from voters to see them acting to alleviate suffering. So, these officials may create a regulatory agency which they claim will prevent future crises. They need experts to run the agency, and the best place to find such experts is in the banking industry where the crisis took place. The banks, for their part, now have to deal with a new regulatory body, and hire lobbyists to represent their interests. These lobbyists are part of the same peer group, and may even be former colleagues, of the new regulators.
The agency seeks to fulfill its charter, but that charter may not prevent crises. Indeed, perhaps the original crisis was itself the result of a prior well-meaning but misguided regulatory attempt to prevent a previous crisis. And so, when some new crisis emerges, elected officials have a new incentive to add new regulatory agencies, and the regulated industries have even more incentive to lobby regulators. Large, private industries capable of navigating the regulatory terrain thus grow up alongside—they co-evolve with—an ever more expansive regulatory state.
This feedback of incentives is the seedbed from which cronyism grows. It involves rational if self-interested actions of private companies, politicians and government regulators. It can happen even without baser motives of greed and the lust for power. But these motives can catalyse the feedback. They can create a situation where it is difficult to enter the industry without the resources to navigate the regulatory landscape. So, big business thrives alongside extensive regulation whilst new and smaller businesses find it difficult to compete.
“Full spectrum cronyism” involves much more than this, however. Man does not live by economics and politics alone. He does not just want to amass a fortune and power. Indeed, as his wealth grows, an industrialist or entrepreneur may find more fulfillment, and even more social status, by talking about world peace, trying to eradicate hunger and disease, spreading “sexual freedom” and “marriage equality” and saving the planet. The businessman thus becomes a philanthropist and political lobbyist. Think of Bill Gates and George Soros. Both men amassed fortunes worth many billions of dollars in the private sector. They then spent decades as equally powerful and influential philanthropists. Of course, philanthropy is, in itself, virtuous. But some kinds of philanthropy can be connected with political lobbying which feeds the development of global elites.
Any robust account of cronyism in the early twenty-first century must account for this shifting of roles, and the social institutions that encompass it.
A case study in cronyism: the 2008 financial crisis
The 2008 financial crisis in the US provides a quintessential example of full-spectrum cronyism. The media focused on stereotypical villains: Wall Street greed, deregulation and unfettered competition. These culprits were blamed in the 2010 Dodd-Frank Act putatively designed to prevent another crisis.
The widely-accepted story, however, is far from the mark. I describe the real story in detail in my book Infiltrated (Richards, 2013). The simplest way to distill it is to ponder a simple question: in a free market—fettered by a reliable rule of law but little political micromanaging—would “NINJA” loans exist? Would they be common? These notorious loans were available to borrowers with “no income, no job or assets” as late as 2007. Even if we assume that lenders are fueled by avarice, would they be likely to give out loans that they doubt will be repaid? Not normally. Something clearly had scrambled the normal market incentives, including price signals, in the mortgage bazaar. That something was a wide range of “affordable housing goals”, enacted over several decades across many government departments, all designed to increase home ownership among lower-income Americans.
Thanks to the work of Edward Pinto and Peter Wallison, and later to the US Securities and Exchange Commission, we know that, as a result of these efforts to expand homeownership, by 2008 there were about 27 million were “non-traditional”, “subprime” and otherwise risky loans.
The government-sponsored enterprises Fannie Mae and Freddie Mac held 12 million of those loans—which they bought on the secondary market under stiff quota requirements from the Congress. The Federal Housing Administration (FHA) and other federal agencies held 5 million and Community Reinvestment Act and HUD programs had another 2.2 million. That makes a total of 19.2 million risky loans held by entities controlled by or within the federal government. Only for 7.8 million loans did the risk lie entirely with private lenders.
Alongside this market for risky loans grew an implicit understanding that the large financial institutions, at least collectively, would enjoy a government-sponsored safety net if they got into trouble. They came to believe that they would be “too big to fail”. Or rather, they acted as if they were too big for the government to allow them to fail. This attitude led to severe moral hazard in which banks were willing to take on far more risk than they would if they knew they would bear the full consequences of failure. A report by the Federal Reserve Bank of Richmond in 2013 (republished as Haltom and Lacker, 2015) stated:
In a series of incidents beginning in the 1970s, the Fed, in cooperation with the Federal Deposit Insurance Corporation, intervened to limit bank failures’ effect on creditors. Early interventions were relatively small, but they established precedents that led potential creditors to expect to be rescued in future instances of financial distress, weakening their incentives to limit borrower risk-taking and vulnerability. Government-lending programs often appeared to stabilize markets because they confirmed hopes of intervention, and so have been hailed as successes. But this has come at the cost of moral hazard, greater risk-taking, and greater instability down the road. (Haltom and Lacker, 2015, page 3).
This form of government support for financial markets is a particularly prominent feature of the US financial system which was the seat of the financial crisis.
The crisis was not the fruit of deregulation or an “unfettered” free market that lacked government oversight. After all, two-thirds of all risky loans in the system “were held by the government or entities acting under government control”[5], and they existed largely because of aggressive government housing policy spanning several decades. And it encouraged behaviour by private institutions that would have been unthinkable without the possibility of a government-sponsored back stop. This was the sine qua non of the 2008 financial crisis.
One effect was a meltdown in the financial sectors involved in mortgages and mortgage-backed securities. It is a perfect illustration of what can happen when governments interfere with the co-ordinating power of prices in a properly-functioning, competitive market.
Unfortunately, rather than unwinding itself from the private housing market, government doubled down on its role. Firstly, it effectively nationalised “government-sponsored enterprises” Fannie Mae and Freddie Mac, thus providing government subsidies to private investors. Then, it orchestrated buy-outs among key financial institutions and forced loans on the nine largest US banks.
Then came the 2010 Dodd-Frank Act—named after two members of Congress who had been ardent champions of government housing policy—Chris Dodd and Barney Frank. Among the many provisions of this law was a call to designate large banks and financial firms as “systemically important financial institutions”. In other words, the law made “too big to fail” explicit government policy. The 848-page act also created a new regulatory agency, the Consumer Financial Protection Bureau, with expansive powers over the entire financial sector of the economy—including industries that had nothing to do with the financial crisis. Federal agencies under the Act’s direction now add over six million new words of regulation every year.[6] No elected legislator plays a role in these regulations. Regulators, and corporate lobbyists, do.
The financial crisis should have provided a lesson in what can happen when market discipline is distorted by regulatory incentives. This is not to say that there will never be failures in financial markets without the interventions described above – our human nature ensures that there will be. However, every significant intervention by the government in these markets arguably made the financial crisis more likely or its effect worse.
The failure of every intervention then becomes an excuse for more intervention. In a healthy market economy, the costs are linked to the benefits of enterprise. Entrepreneurs who invest their savings in a business may enjoy success or failure. This fact helps focus and discipline the risks they accept. Cronyism, in contrast, tends to detach costs and benefits. At its worst, it privatises profits and socialises costs. Failure tend to reinforce the business-regulator relationships which are problematic to begin with.
The aftermath of the crisis
Some noticed the cronyism between government and large banks that received loans or bailouts. But few observers noticed cronyism outside the business and political spheres. It included actors in the media, non-profit and philanthropic world, all of which had excessive influence in the crisis and its legislative aftermath. This full-spectrum cronyism was a harbinger of the future.
For example, in August 2010, housing activist Martin Eakes boasted to a gathering of MBA students at Duke University that the ideas hatched in non-profits that he founded, called Self Help, were now the law of the land. He was referring to provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act, which had passed the month before. Regulatory ideas have to hatch somewhere, of course. But Eakes’s statement revealed that cronyism can reach beyond business and government. Firstly, he and his Self-Help non-profits were key players in sub-prime lending and cheerleaders for the government’s “affordable housing” goals. Indeed, Eakes played an important role in mediating risky loans from unwilling private banks to an initially squeamish Fannie Mae. Secondly, he claimed in the same speech that Self Help’s national lobbying arm, the Center for Responsible Lending (CRL), had “hired fifty lawyers, PhDs, and MBAs to basically terrorize the financial services industry for any of their abusive practices nationwide” (Richards, 2013, page 65).
CRL was inspired and funded primarily by California Savings & Loan owner Herbert Sandler, who wanted Eakes’s work to have a national impact (Self-Help now owns a ten-story building in Washington, DC, a few blocks north of the White House). Sandler and his wife, Marion Sandler, made news in 2008 at the height of the financial crisis. As it happens, their bank had pioneered the “option ARM loan” which the New York Times called the “Typhoid Mary” of the housing crisis. Time magazine listed the couple among the 25 people to blame for the financial crisis.
The Sandlers, however, did not suffer irreparable harm from this temporary bad press or from the housing crisis itself. They had cashed out in 2006—at the height of the housing bubble—by selling their company for $24.3 billion to Wachovia in North Carolina—the same bank that went bankrupt two years later. This allowed the Sandlers to engorge their charitable foundation, making it one of the thirty largest foundations in the country. They immediately began to fund media operations that provided the metanarrative of Wall Street greed and Republican deregulation that supposedly led to the financial crisis. They also continued to heavily fund the non-profit Center for Responsible Lending.
Herb Sandler appeared before the official Financial Crisis Inquiry Commission, but its final report carefully preserved his self-defence and rationalisations. The California politician who chaired that commission, Phil Angelides, had enjoyed Sandler support as California state treasurer. In that capacity, Angelides had funneled pension money from state employee and teachers’ unions to “private equity businesses in underserved areas” and “affordable housing”.
With so much cross-fertilisation, it was inevitable that many from this web would find their way into federal bureaucracies. One example was Mark Pearce, who became Director of the Federal Deposit Insurance Corporation’s (FDIC) Division of Depositor and Consumer Protection. We were told in 2010 that the US needed a new bureau—the Consumer Financial Protection Bureau—to protect consumers, since the other agencies (such as the FDIC) could not. Yet the FDIC created its own consumer protection division the same year, which now has many hundreds of employees.
Pearce was a long-time employee at Self-Help and was the first president of its Center for Responsible Lending[7], with its horde of “financial terrorists”. The foxes were not only hired to run the hen house: they laid its foundations.
This is only one tiny chapter of a much larger saga of the full-spectrum cronyism—some on display, some behind the scenes—that played a crucial role in both the financial crisis and its official response. It involved not just government agencies and private corporations, but philanthropists, non-profit charities and activist organisations. And it was a template for the cronyism to come.
The Holy See missed the cronyism at the root of the financial crisis
The 2008 financial crisis is relevant to this chapter because the Holy See has responded to it. That response provides us with the best example of how the Church, in Her teaching function, failed to respond to cronyism.
In 2018, a decade after the financial crisis, the Church published Oeconomicae et pecuniariae quaestiones (“Financial and economic questions”, OPQ hereafter). It is the closest thing we have to an official Church interpretation of the 2008 financial crisis.[8]
OPQ’s indisputable moral claim is that the human person should be front and centre in any economic discussion, and that money and economics always have an ethical dimension. Human dignity and the common good are recurring themes throughout. Sections 1, 2, and 4 discuss the ethical criteria for judging markets and finance. OPQ also affirms the goodness of finance (15) and profit (23) for meeting human needs. Although it avoids sweeping attacks on finance in general, it tends to treat finance as distinct from the “real economy”—a phrase it uses five times.
Unfortunately, the document is also marked by misconceptions about the financial crisis. Specifically, it argues that the crisis was caused by individual and collective greed, overly complex and avaricious financial instruments, and a lack of national and supranational regulation of financial markets. Its basic argument is that the self-sufficiency of markets is a myth (21). Therefore, there should be far more regulation of financial markets to avoid future crises.
This follows the media stereotype about the cause of the crisis. Take its invocation of greed: this vice is universal; and there’s no evidence that greed was more rampant in 2008 than in, say, 1998. Pointing to greed as the cause of the crisis is like pointing to the presence of an oxygen-rich atmosphere to explain why a car exploded in front of a house of the district attorney. It fails to point to the sine qua non of the event.
The call for more regulation of financial markets also misses the main lessons of the financial crisis. Firstly, the 2008 financial system was already the most highly regulated sector of the US economy. And it was already shaped by international banking protocols such as Basel I and Basel II[9] and a complex web of trade agreements. There was no self-sufficient market—whatever that means—to speak of.
Secondly, as noted above, regulation played a decisive role in the crisis. Through its housing directives, the federal government created a massive demand for housing through risky loans, and the market delivered them. OPQ mentions these loans briefly but treats them as products of malicious private actors. It shows no awareness that housing policies and regulations created and incentivised these loans in the first place (25).
Thirdly, OPQ misinterprets the role of securities. It’s true that securitisation and sundry derivatives magnified and globalised the effects of these risky loans. The problem was aided and abetted by misleading ratings which under-estimated the true risks of these products. Those misleading ratings and the use of securitisation were both encouraged by the international regulatory environment by which capital requirements for banks were determined by the credit ratings of securities. In many ways, securities helped to diversify risk within the financial system which is why the regulatory system encouraged their use. Moreover, they did not cause the crisis, contrary to the suggestion of OPQ (26). Without the underlying risky loans, the financial instruments would not have been a problem.
Finally, when OPQ comments on the detail of regulation, its emphasis is often wrong. One example is its claim (22) that “systemic crisis” could have been avoided if certain “banking responsibilities” were separated. This seems to be an oblique reference to the so-called “Volcker Rule” which would separate investment and commercial banking. But there is no example of how separating these functions would have mitigated the crisis. On the contrary, had the Volcker Rule been in place in 2008, the damage may have been even worse. At the peak of the crisis, Bank of America—a commercial bank—bought Merrill Lynch, an investment bank. That kept Merrill Lynch from failing. And in March 2008, Bear Stearns, the first investment bank to get in trouble, was bought out by JP Morgan Chase, a commercial bank. So, if the OQP-recommended barrier between commercial and investment banks had been in place, it could well have made the crisis more rather than less severe.
This is an example of what John Finnis refers to as the frequent “dependence” in Catholic social teaching “on judgments about empirical facts and likelihoods”. And, in this case, the judgement is mistaken. In short, although the Holy See had ten years of hindsight, it failed to discern the forms of cronyism on display in the 2008 financial crisis, and instead relied on popular, but misleading, stereotypes.
The risk of crony capture at the Vatican
“Rome Call for AI Ethics”
The hierarchy’s lack of sensitivity to the dangers of cronyism also seems to be on display in its recent initiative on artificial intelligence.
On February 28th 2019, the Pontifical Academy for Life sponsored a conference to launch the initiative. The opening document, “Rome Call for AI Ethics”, reiterates moral truths that no Catholic will dispute. The gist of the statement is that AI must be developed to serve humanity and the common good. Indeed, other than adding a few theological truisms, the statement does not provide any new insight or add a fresh Catholic take on the topic. Instead, it calls for AI to help people, to improve education, to respect privacy and not to discriminate against people.
Why was the statement so generic? Perhaps the reason is that Archbishop Paglia was joined as a signatory by Brad Smith, President of Microsoft; John Kelly III, Vice President of IBM; Dongyu Qu, General Director of the UN’s Food and Agriculture Organization (FA); and Italian government official Paola Pisano. David Sassoli, President of the European Parliament, also participated in the event. Earlier Vatican events have included other such corporate luminaries. And a 2018 Vatican hackathon enjoyed support from the likes of Google, Salesforce, and Microsoft.
These are the partners for this ongoing initiative. So, what can we expect beyond conventional wisdom? How likely is it, for instance, that we’ll get a robust critique of materialist metaphysics and the false view of man and machine so common in the AI literature and community?
One danger is that these relationships between business, transnational organisations and the Vatican on such specific initiatives encourage cronyism more widely. A statement signed by the heads of IBM and Microsoft which insists that “new forms of regulation must be encouraged to promote transparency and compliance with ethical principles” could easily lead to giant corporate actors colluding with government to prevent small competitors from entering the market. This might look like government holding private companies accountable. In reality, the relevant government agencies can be captured by the large, well-established industries they claim to be regulating. These agencies do not so much regulate as craft regulations that hinder future competitors.
Of course, these actions are always defended for virtuous reasons—public safety, public health, transparency and the common good. But should the Church, and, in particular, the Pontifical Academy for Life, partner with IBM and Microsoft to make pronouncements on tech regulation? Given the financial interests of these organisations, it might serve to provide large tech companies with moral cover in their calls to regulate the competition.
Council for Inclusive Capitalism
There is a further, even more worrying, example from December 2020. To much fanfare, the Vatican announced that it was partnering with global titans to support a new organisation called the Council for Inclusive Capitalism.[10] The opening meeting included finance ministers from several countries, as well as the head of the International Monetary Fund. According to Pope Francis, the effort is supposed to reduce poverty and inequality.
Members of the council are called “Guardians” who “at their respective companies, have said they plan to hire and promote more women, increase diversity hires, commit to clean energy by purchasing 100% renewable electricity, reduce greenhouse gas emissions, promote the reuse and recycling of water and other initiatives.”[11] It’s not clear how all of these initiatives will solve poverty or reduce inequality. Represented amongst the Guardians are: the president and CEO of Mastercard; the executive chairman of Dupont; the chairman of the board and CEO or Johnson & Johnson; the CEO of BP; the chairman of the board and CEO of Bank of America; and the president and CEO, State Street Corporation.
We can assume that these initiatives are well-intentioned and, indeed, they may be appropriate. But it is important to proceed with caution. On the one hand, it may be possible to help corporate organisations be more ethical by co-operating with them in this way. On the other hand this approach could provide corporations with window-dressing as they use connections in global organisations and in government to promote their own interests.
The path forward: the importance of identifying cronyism
The Vatican has not connected cronyism with the financial crisis and has often given tacit support to models of co-operation between big business and government that might encourage cronyism. Still, Pope Francis did identify the risk very starkly in Laudato si. In this chapter, we have emphasised the form of cronyism whereby private sector interests can capture regulatory systems and use them to their own advantage. In Laudato si, Pope Francis identifies a different form of cronyism in which corporations corruptly avoid the law to benefit their own private interests and those of politicians. He wrote:
Often, politics itself is responsible for the disrepute in which it is held, on account of corruption and the failure to enact sound public policies. If in a given region the state does not carry out its responsibilities, some business groups can come forward in the guise of benefactors, wield real power, and consider themselves exempt from certain rules, to the point of tolerating different forms of organized crime, human trafficking, the drug trade and violence, all of which become very difficult to eradicate. (197)
Corrupt relationships between business and government are common in many countries. Experience of this problem in South and Central America may explain Pope Francis’s example. Given the fallen nature of man and the resources that are at the disposal of government and business, there is a real danger that close relationships between both can give rise to opportunities for enrichment, which harm the common good.
An example in South America is the “carwash” scandal[12]. This saga involved a nationalised business, private businesses and politicians. The total amount of money misdirected to personal interests is not known, but it is probably over $2 billion. The unwinding of the scandal contributed to a sharp recession and inflation in Brazil and, arguably, the loss of trust in government and the rise of populism criticised in Pope Francis’s most recent encyclical Fratelli tutti.
Catholic social teaching does provide guidance on cronyism. Catholics, and the Holy See itself, would do well to draw on its resources in developing Catholic social thought and teaching about this subject. Many Catholic social teaching principles—private property, the common good, solidarity, equality and subsidiarity—bear on cronyism. There is also the wider content of Christian theology itself. Any full treatment would go beyond a single chapter. Let us focus here on subsidiarity and original sin.
A proper account of subsidiarity
In Quadragesimo anno, Pius XI summarises the principle of subsidiarity while defending the existence of non-state institutions. He refers to it as “that most weighty principle, which cannot be set aside or changed, remains fixed and unshaken in social philosophy”:
Just as it is gravely wrong to take from individuals what they can accomplish by their own initiative and industry and give it to the community, so also it is an injustice and at the same time a grave evil and disturbance of right order to assign to a greater and higher association what lesser and subordinate organizations can do. For every social activity ought of its very nature to furnish help to the members of the body social, and never destroy and absorb them. (79)
Subsidiarity implies a normative judgment about the jurisdictions and responsibilities of various institutions. Some institutions should have primary jurisdiction or responsibility over some domains and functions. Others should have secondary or tertiary, and so on, responsibility. And some should not have responsibility over a jurisdiction.
A complete account of how subsidiarity applies in a society, then, should answer, for each institution or social sphere, the following:
1. Does this institution have proper jurisdiction over X?
where X is some domain or function. Examples would include raising children, buying a house, growing vegetables, selling used cars, declaring war, and establishing a speed limit on a side road. If an institution has, or should have, proper jurisdiction over X, then that institution must, in principle, be competent to exercise that responsibility. Competence is a necessary condition for proper jurisdiction.
If the answer to (1) is “no”, then that institution should, simply put, not have responsibility over X.
If the answer is “yes”, then the next question is:
2. Does this institution have primary, secondary, tertiary, etc. jurisdiction over X?
How (1) and (2) are answered may depend in part on the political philosophy held by the person answering the question. But answers should also depend on observation and experience. We know, for instance, that mothers and fathers should have primary responsibility for raising children. Why? By reflecting on human nature, by a careful reading of Holy Scripture and Sacred Tradition, and by observing that most cultures throughout history have recognised this fact.
Defining subsidiarity, which Catholic social teaching does, is one thing. Answering (1) and (2) precisely is more difficult. So, the question arises, which institution should have primary jurisdiction when it comes to determining the terms on which people trade, including prices, in the economy?
It can be argued that the principle of subsidiarity and human reason and experience suggest that no human institution has literal jurisdiction for determining these things. The state should, though, ensure that the market be governed by the general rule of law, including robust property and contract rights in a setting which allows prices to change freely based on the interactions of buyers and sellers, following their own subjective assessments and incentives.
When states try to exercise more direct control over markets—by fixing prices, setting quotas, and the like—they scramble the information-bearing function of prices, which leads to distortions such as shortages and surpluses or waste. In this way, states show that they do not have the competence to determine prices. If a state lacks competence to determine prices, then it cannot have responsibility for them. Furthermore, intervening in markets in this way draws business into close proximity to the state and provides the opportunities for cronyism that we have discussed.
This way of thinking would seem to accord with Centesimus annus paragraph 42, which expressed the view that a free economy was the desirable form of economic organisation, but that the state should ensure that the market operated in a well-functioning legal framework. In this way, prices in a competitive market emerge from countless interactions of actors in a marketplace. The state plays a role that is essential and that is within its competence. Businesses and individuals, in turn, are able to do what only they can do.
This also helps us see one of the problems with cronyism. A properly-functioning market allows firms to compete for customers, investors, and employees according to the same legal rules. “Competition” here has no Darwinian connotations. If two people want the same gallon of petrol, their competition for the petrol is a fact. That is the nature of scarcity. The question is how to adjudicate it. We know, by long experience, that competitive markets generally improve the quality and lower the price of such goods and allocate them where they are most valued. Or, at least, they do this better than any known alternative. As a “discovery process”[13], a market is better—for customers, employees, and the common good—if it includes many firms competing for customers and employees. The alternative is not the brotherhood of man or universal co-operation. It is a monopoly.
A literal monopoly usually involves not just a single provider but also unfair barriers to entry for potential competitors usually reinforced by government often as a result of a process of cronyism. This drastically mutes the benefit of markets. Besides a literal monopoly, however, there are quasi-monopolies, which create similar problems. One quasi-monopoly is a cartel, when competitors collude to restrict supply, control prices, and lock out competition. These are illegal in developed countries.
Cronyism is another, more protean form of quasi-monopoly, which has much the same effect as a cartel. Cronyism disrupts the functioning of markets by breaking down the proper borders of different institutions. So, rather than, say, national regulators and powerful corporations performing complementary functions according to the principle of subsidiarity, they can come together to serve their own narrow benefit at the expense of others and to the detriment of the common good.
If government and business are allowed to play their distinct and different roles in the economy in this way, there will be a distance between them. There may be particular situations in which government may reasonably intervene, for example to ensure supplies of a vaccine on an equitable basis during a pandemic, to deal with monopoly or to prevent environmental damage. However, as the Compendium of the Social Doctrine of the Church puts it: “state action in the economic sphere should also be withdrawn when the special circumstances that necessitate it end” (Pontifical Council for Justice and Peace, 2005, 188). Though this statement is not related to cronyism, governments not intervening in the economic sphere unless it is strictly necessary makes it less likely that cronyist relationships between politics and business will develop. Business and politics have their own domain. The state should not take over the role of business. If it does, there is a danger that business will then take over the realm of politics, as Pope Francis warns in Fratelli tutti (77).
Original sin
Another related principle, fundamental in Christian theology, is original sin. “Certain new theologians dispute original sin”, quipped G.K. Chesterton in Orthodoxy, “which is the only part of Christian theology which can really be proved.” The doctrine of separation of powers in the US Constitution is famously attributed to a widespread, Calvinist-tinted conviction that no one should be trusted with too much power over others. As James Madison put it in Federalist 51, exaggerating for effect:
If Men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and the next place, oblige it to control itself.
This conviction, that someone should watch the watchmen, is not unique to Calvinism. Still, the political importance of original sin has, at times, been less prominent in Catholic social teaching than it could have been. In Rerum novarum, for instance, Pope Leo XIII was right to call for harmony and co-operation between capital and labour in a hierarchal Catholic polis. But he may have been, as Randall Morck and Bernard Yin Yeung put it in their critique of corporatism in Catholic social teaching: “overconfident in asserting that ‘the Church possesses a power [to] bring men to act from a motive of duty, to control their passions and appetites, to love God and their fellow men.” They continue:
Power corrupts even devout Catholics. Elites less vulnerable to upset by takeovers, foreign competition, or the unhindered economic mobility of talented upstarts wield a more absolute power, and therefore risk a more absolute corruption. Corporatism’s sanctified cartels bleach private property of its social purpose—the unleashing of market forces to effect such upsets and reallocate resources to where they are most valuable. Without conveying the freedom to change jobs, retool factories, and create new markets, private property is no more than the dead hand of entrenched privilege.[14]
A proper account of social spheres—of subsidiarity—must include a realistic view of fallen human beings. In particular, it should recognise that counterbalancing interests between spheres is sometimes the very best way to foster co-operation and the common good. A cozy alignment of interests between power elites in government, business, non-profit organisations, philanthropy and culture is rarely a sign of harmony, but rather of concentrated and corrupt power in the hands of the few.
If the Holy See is to help faithful Catholics navigate the byzantine maze of cronyism in the 21st century, it will need to develop these insights, and avoid entanglements with the power elites at the center of the maze. It will need to embrace the insight of an erstwhile critic, Lord Acton, who insisted that “power tends to corrupt” even popes and kings, “and absolute power corrupts absolutely.”[15]
The evidence suggests that cronyism is becoming the dominant form of political economy, so there is little time to waste.
References
Dal Bó E. (2006), Regulatory Capture: A Review, Oxford Review of Economic Policy 22 (2), 203-22.
Hayek F. A. (2002), Competition as a Discovery Procedure, The Quarterly Journal of Austrian Economics 5(3), 9-23.
Finnis J. (2019), “A Radical Critique of Catholic Social Teaching,” in Bradley G. and Brugger E. (eds.), Catholic Social Teaching: A Volume of Scholarly Essays, Cambridge: Cambridge University Press.
Gregg, S. (2019), “Quadragesimo anno (1931)”, in Bradley G. and Brugger E. (eds.), Catholic Social Teaching: A Volume of Scholarly Essays, Cambridge: Cambridge University Press.
Haltom R. and Lacker J. M. (2015), Should the Fed Have a Financial Stability Mandate? Lessons from the Fed’s First 100 Years, Economic Quarterly 101(1), 49-75.
McLaughlin P. (2014), Measuring the Dodd Frank Act (and Other Major Acts) with Regdata 2.0, Regulation (September 23, 2014)
Morck R. K. and Yeung B. Y. (2010), Corporatism and the Ghost of the Third Way, Capitalism and Society 5(3), article 2, https://ssrn.com/abstract=2209136.
Pontifical Council for Justice and Peace (2005), Compendium of the Social Doctrine of the Church, London: Burns & Oates.
Ratzinger J. (1986), Church and Economy: Responsibility for the Future of the World Economy, Communio 13, 200-204.
Richards J. W. (2020), What Economists Know, Believe, and Debate, Journal of Markets & Morality 23(1), 117-130.
Richards, J. W. (2013), Infiltrated, New York: McGraw Hill.
Wallison P. (2011), Official “Dissent” to the Financial Crisis Inquiry Report, Official Government Edition (revised February 25, 2011), at: http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.
Williamson P. J. (1985), Varieties of Corporatism: A conceptual discussion, Cambridge: Cambridge University Press.
Papal encyclicals and other Church documents referred to in this section
Francis, 2020, Fratelli tutti, encyclical letter:
Congregation for the Doctrine of the Faith and Dicastery for Promoting
Integral Human Development, 2018, Oeconomicae et pecuniariae quaestiones (Considerations for an ethical discernment regarding some aspects of the present economic-financial system):
Francis, 2015, Laudato si’, encyclical letter:
John Paul II, 1991, Centesimus annus, encyclical letter:
John Paul II, 1987, Sollicitudo rei socialis, encyclical letter:
Congregation for the Doctrine of the Faith, 1986, Instruction on Christian Freedom and Liberation:
Pius XI, 1931, Quadragesimo anno, encyclical letter:
Leo XIII, 1891, Rerum novarum, encyclical letter:
Questions for discussion
Who bears responsibility for creating the conditions in which crony capitalism develops and thrives?
Why is cronyism so difficult to reverse?
How is the principle of subsidiarity important for rolling back crony capitalism?
What were the elements of crony capitalism that were prominent in the financial crisis?
What is the difference between crony capitalism and socialism?
Footnotes
[2] See Morck and Yeung (2010) and, for a good general treatment of the forms of corporatism, see Williamson (1985).
[3] Mussolini, describing his own vision of totalitarian fascism, said, “Everything within the state, nothing against the state, nothing outside the state.” Cronyism is not a distinct political philosophy, and so would never have a motto. But as a tendency, it moves toward “everything inside the machine, nothing against the machine, nothing outside the machine.” The machine is the amorphous sphere of social control that emerges from the collusion, behind the scenes, of powerful institutions that may remain visibly and even legally independent.
[4] https://www.thecatholicthing.org/2014/08/30/the-myth-of-catholic-social-teaching-2/
[5] Wallison (2011, page 453).
[6] McLaughlin (2014), https://www.mercatus.org/publications/regulation/measuring-dodd-frank-act-and-other-major-acts-regdata-20
[7] https://www.fdic.gov/about/comein/biosPearce.html.
[8] Though the media gave the CDF document fawning coverage, it received little serious analysis. The one important response to it came from the (Catholic) Chairman of the Commodity Futures Trading Commission, along with its chief economist. The pair wrote an open letter to the Holy See, correcting what they took to be major errors and misconceptions in the CDF document involving derivatives and credit default swaps. J. Christopher Giancarlo and Bruce Tuckman, “CFTC Chairman J. Christopher Giancarlo Response to Bollettino” (July 21, 2018), https://cftc.gov/PressRoom/SpeechesTestimony/giancarloresponsetobollettino072118.
[9] Basel II: Revised international capital framework: https://www.bis.org/publ/bcbsca.htm
[10] https://www.inclusivecapitalism.com.
[11] Jack Kelly, “Pope Francis Partners with Corporate Titans to Make Capitalism More Inclusive and Fair,” Forbes (December 9, 2020), https://www.forbes.com/sites/jackkelly/2020/12/09/pope-francis-partners-with-corporate-titans-to-make-capitalism-more-inclusive-and-fair-is-this-for-real-or-just-corporate-virtue-signaling.
[12] https://www.britannica.com/event/Petrobras-scandal
[13] F.A. Hayek described competition as a discovery process in Hayek (2002) which is a translation by Marcellus S. Snow of Hayek’s 1968 lecture “Der Wettbewerb als Entdeckungsverfahren,” sponsored by the Institut für Weltwirtschaft at the University of Kiel.
[14] Morck and Yin Yeung (2010, page 40).
[15] Acton wrote this in a letter to Anglican Bishop Mandell Creighton on April 5, 1887, in which he is discussing how historians should treat the corrupt actions of popes. Quoted in the Online Library of Liberty, https://oll.libertyfund.org/quotes/214.