Ethics & Public Policy Center

The Economics of Loving Your Neighbor

Published in Princeton University on March 6, 2006



[NOTE: The graphs and charts from Mr. Mueller's presentation are available in PowerPoint and PDF formats by clicking here.]

Princeton University and the Pace Center deserve our thanks for organizing this panel on “The Economics of Loving Your Neighbor.” The great German economist Wilhelm Röpke once wrote, “Economically ignorant moralism is as objectionable as morally callous economism.” By inviting economists like Alan Blinder, William Niskanen, and Uwe Reinhardt to discuss its mission of civic engagement, the Pace Center is in a good position to avoid both objections.

I’d like, first, to explain why modern economic theory has difficulty describing our topic; second, try to outline what “loving your neighbor as yourself” means in economic terms and the basic principles for doing so at the personal and political levels; and finally, to suggest how America can meet its biggest economic challenge in coming decades: to avoid repeating Europe’s mistakes, reflected in falling fertility and rising unemployment, as the result of misunderstanding those principles.

What is economics about? Well, what do people do all day? Jesus once noted in passing that since the days of Noah and Lot, people have been doing, and until the end of the world will be doing, four kinds of things. He gave these examples: “planting and building,” “buying and selling,” ‘marrying and being given in marriage,” and “eating and drinking.” In other words, producing, exchanging, distributing and using our human and nonhuman goods. That’s the usual order in which we do these actions. But in planning them, first we choose the persons who are the “end” or purpose of our action, which we will express by distributing our goods to them; then we choose the goods we intend to use as means for those persons; and finally we choose how to “realize” them through production and exchange. So we might say that economics is essentially a theory of providence. It describes how we provide for ourselves and the other persons we love, using scarce means that have alternate uses.

A Brief, Remedial History of Economics. Scholastic economics (c. 1250-1776) began when Thomas Aquinas integrated these four elements, drawn from Aristotle and St. Augustine, into an outline that was taught at the highest university level for more than five centuries. Classical economics (1776-1870) began when Adam Smith tried to cut these four elements to two (production and exchange)—dropping Augustine’s theory of utility (which describes consumption) and replacing Augustine’s theory of personal gifts and crimes and Aristotle’s corresponding theory of distributive justice with the assumption that everyone is purely selfish. Today’s neoclassical economics (1870-c.2000) began when three economists[1] dissatisfied with Smith’s scheme rediscovered Augustine’s theory of utility, causing it to be reintegrated with the theories of production and exchange. In a forthcoming book[2], I predict that “Neoscholastic” or AAA economics[3] (c.2000-?) will soon revolutionize the field again by replacing its lost cornerstone.

What does it mean to “love your neighbor as yourself?” We all naturally love ourselves, Augustine pointed out. The purpose of the Two Great Commandments (“You shall love…God with all your heart” and “love your neighbor as yourself”) is to make sure that this love is “ordinate”: rightly ordered. He started from Aristotle’s definition of love: willing some good to some person. (When I say, “I love ice cream,” I really mean that I love myself and use—consume—the ice cream to express that love.) Because it‘s always possible to avoid depriving others of their goods, doing so is both the bare minimum of love and the measure of what Aristotle called justice in exchange. But when scarce goods (like time and money) are involved, Augustine noted, loving your neighbor as yourself can’t always mean equally with yourself: “Since you cannot do good to all, you are to pay special regard to those who, by the accidents of time, place, or circumstances, are brought into closer connection with you.”

The social analog to personal gifts is what Aristotle called distributive justice: the rules by which we share the use of common or jointly owned goods in communities like a family or government. Both are a kind of “transfer payment” determined by a geometric proportion, and both are practically limited by the same fact of scarcity. This is why most ownership must be private rather than common, and social and functions are best left to the smallest unit able to fulfill them.

Given this constraint, there are four basic rules of successful economic policy, which satisfy both justice in exchange and distributive justice: 1. Fund general government (e.g., defense) with an income tax falling equally on labor and property income. 2. Fund more narrowly targeted benefits (e.g., Social Security pensions for workers) or owners of property (e.g., tax-advantaged savings accounts) by taxing only labor or property income, respectively. 3. Borrow only to invest in government-owned assets (like ships or buildings). 4. Don’t fund government by issuing money.

Faction and ideology. As James Madison explained, faction is endemic to representative government. A faction subordinates the general interest that includes everyone to its own narrower interest, and factions depend on what we now call ideology (which Hannah Arendt aptly described as the creation of a “fictitious world”). Each faction tries to redefine justice so as to shift burdens to the other party’s faction and benefits to its own. Collectivists try to restrict justice to distributive justice (as if all goods were common) while individualists try to restrict it to justice in exchange (as if there were no common goods). Both premises are false.

But we miss Madison’s point if we believe that all this only applies to the other guy. As John the evangelist put it, if we say we are without sin we deceive ourselves. Generally speaking, the Democratic Party’s constituents disproportionately earn labor income while my own Republican Party’s disproportionately earn property income. The purpose of the Democrats’ fiction is to tax property owners to benefit workers, and of the Republicans’ fiction to tax workers to benefit property ownership. Today both parties violate all four principles. Republicans have joined Democrats in funding general government with the Social Security surplus and foreign central bank reserves. This has reduced national saving, increased the trade deficit, and caused today’s rampant commodity inflation.

If we want to see where this can lead, we have only to look across the water to Europe and Japan, where fertility rates have fallen and unemployment rates have risen. This month the Notre Dame Journal of Law, Ethics, and Public Policy[4] will publish an article in which I apply the principles I have outlined to estimate what would happen to the employment and fertility of American workers if currently projected fiscal policy comes to pass. I differ with my more libertarian Republican colleagues by thinking that President Reagan got it just about right on both the income tax and Social Security. There is nothing wrong with either in principle. But their projected size is a major problem.

As is well known, over the next 75 years, the share of our national income absorbed by the Federal government is projected roughly to double, due partly to the projected growth of Social Security, but mostly Medicare, Medicaid, and the increased burden of interest (because it is assumed that the increased spending will be paid by borrowing).

For reasons explained in my paper, there is a close relationship between the unemployment rate and the combined share of national income received by workers as take-home pay plus government benefits to other persons. (This depends not only on the size but the kind of benefits.) I estimate that after dipping for about a decade, the unemployment rate would rise to back over 6 percent by 2025, over 9 percent by 2050, and over 11 percent by 2075.

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Under those circumstances, I estimate that the Total Fertility Rate, which is currently about 2.05, close to the rate that would just reproduce the current generation of Americans, would decline to about 1.9 by 2025, 1.7 by 2050, and 1.6 by 2075. The reason is that, as in Europe, young American couples would no longer be able to afford to raise enough children to replace themselves. However, I also estimate that, since legal abortion has reduced the Total Fertility Rate by about 0.6 to 0.7 children per couple, if it were ended, the TFR would rise and remain above the replacement rate for the foreseeable future.

 

It doesn’t have to be that way. There have been proposals around for at least a decade that would balance the Social Security system at close to the current share of national income, and the rest of the Federal budget with a low-rate, broad-based income tax, avoiding both the rise in unemployment and fall in fertility. I have not designed a proposal for solving the problems of Medicare and Medicaid, and look forward to hearing from our other expert panelists how this might be structured to avoid the problems I have outlined. But as long as we respect the ancient logic of “loving your neighbor as yourself” with scarce goods, I am confident that we can devise solutions that avoid both economically ignorant moralism and morally callous economism.


John D. Mueller is director of the Ethics and Public Policy Center’s Economics and Ethics Program and president of LBMC LLC, a financial-market forecasting firm. <msofootnotetext$3>
NOTES

[1] W.S. Jevons in England, Carl Menger in Austria, and Leon Walras in Switzerland.

[2] John D. Mueller, Redeeming Economics: Free Markets and the Human Person (ISI Books, 2006).
[3] Named for the originators and integrator of its four elements: Aristotle, Augustine and Aquinas.
[4] “How Does Fiscal Policy Affect the American Worker?” Vol. XX no. II.

Source Notes
Delivered at Princeton University,

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