Seeing the Forest for the Trees

Prior to the 16th century, economics was considered a moral as well as a monetary discipline. The English word “credit,” for example, is from the Latin credo, “I believe.” Economists were trusted since they saw the forest for the trees. Our current models of capitalism and socialism don’t. Is there a third way to see the big picture?

From Aristotle until the 15th century, John Médaille, an adjunct instructor at the University of Dallas, says free markets concerned themselves with questions of equity (the justice of a system) as well as with questions of equilibrium (supply, demand, and financial return). He notes how, for example, the idea of a just price included economic, political, theological, and ideological considerations. Economics dealt with facts as well as values. Economists, in other words, saw the forest for the trees.

In the 16th century, however, questions of value were relegated to politics and religion. Economists saw themselves as dealing solely with facts. This is positivism, which is “at bottom, an absolute distinction between facts and values,” writes Harvard professor Louis Menand. In a positivist world, theology is subjective and unreliable and “should never be confused with science.”¹ In a positivist world, economics is simply a matter of “doing the math,” since only mathematics—not theology—is science. Science comes from the Greek knowledge. With values no longer considered a science, economics became a monetary, not a moral, discipline. Economists sought to achieve equilibrium without any concern for equity. Today, wealth managers can talk about investments in terms of financial returns, but not human flourishing. That would sound awkward.

Médaille believes this value-free approach can be seen in the two modern models of economics, capitalism and socialism. Capitalism tries to “concentrate property in the hands of a few, and socialism continues this by concentrating ownership in the hands of the state.” Both systems see only a few trees. They are myopic and only concerned with questions of equilibrium and not the equity of economic distribution.

The myopia of socialism became apparent in the late 20th century with the fall of the Soviet Union. The myopia of modern capitalism has become apparent in the early 21st century in what John Lancaster calls “the mathematization of the market.”² This contributed to the economic disaster of 2008, writes Charles Morris, author of The Trillion Dollar Meltdown. Morris says the complexity and the paradoxical unpredictability of markets means financial instruments such as derivatives and subprime mortgages—stripped to mere mathematization—don’t see the big picture. They count numbers but don’t account for human nature. Lancaster writes how risk becomes magnified rather than managed. Derivatives, for example, “are so powerful that—human nature being what it is—people could not resist using them as a form of leveraged bet.”

Not all investors suffer from myopia. Seeing more of the forest, they are shorting their bets on the U.S. economy. According to Carmen Reinhart and Ken Rogoff, authors of This Time Is Different, their “optimistic” scenario has total U.S. government debt rising from 43 percent of GDP in 2005 to 86 percent in 2015. Reinhart predicts that the U.S. will engage in “financial repression,” a sort of “stealth default” relying on inflation, regulation, or outright refusal to pay instead of forced restructurings. If you remember the Weimer Republic, you recognize that this is not a long-term solution.

Niall Ferguson has a similarly pessimistic outlook. He is the Laurence A. Tisch Professor of History at Harvard University and the author of The Ascent of Money: A Financial History of the World. Ferguson notes how Spain was the preeminent economic power in the 1500s. France enjoyed the most robust economy in the 1700s, England in the 1800s. In every case, when their debt exceeded 50 percentage of GDP, they never recovered. The U.S. debt now exceeds 50 percent of GDP. Myopic fund managers don’t see this.

Bill Gross on the other hand seems to see the forest for the trees. Gross is the founder and co-chief investment officer of PIMC. In managing his firm’s Total Return Fund, he is dumping his Treasury holdings. While Gross believes actual default is “unimaginable,” he is betting that the U.S. government will simply inflate its way out of this mess, aggressively dumping new money into the Treasury market. Again, the Weimer Republic is not a good template for financial recovery.

John Médaille suggests a “third way.” In his book, Toward a Truly Free Market: A Distributist Perspective, Médaille describes “distributism” as a “third way” between modern capitalism and socialism. With roots in Aristotle, Aquinas, and Catholic social teaching, distributists believe ownership of property should be as widely distributed as possible, rather than in the hands of a few owners (as in the case of modern capitalism) or state bureaucrats (as in the case in socialism). The right to own property has roots in our country’s founding. It was, rightly, regarded as the cornerstone of liberty. Daniel Webster, in his 1820 address to the Massachusetts Convention, observed how, “Power naturally and necessarily follows property.” In seeking to widely distribute ownership of property, distributists treat economics as a moral and monetary discipline.

Of course, this is a challenge in today’s world. It’s fine to revere Warren Buffett’s wisdom. It’s tough to be taken seriously as a wealth manager if you also cite the Bible as a financial resource. In dividing facts and values, we have taken all questions of value and equality and thrown them on to the political system. As representatives in Washington whitewash the nation’s debt problem, we’re witnessing a rerun of Weimar, not a realistic solution. Yet in assuming that economics is morally neutral, we have made it well nigh impossible for elected officials as well as fund managers to use moral language to see the forest for the trees. “We have cut off our line of retreat,” Médaille concludes. “In the current dialogue, there is really no way out.” Let’s hope he’s wrong and that a new generation of economists finds a way to return economics to being a moral as well as a monetary discipline.

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¹ Louis Menand, The Metaphysical Club (New York, NY: Farrar Straus and Giroux, 2001), p. 207.
² John Lancaster, “Melting Into Air: Before the financial system went bust, it went postmodern,” The New Yorker, November 10, 2008, p.80-84.