Capitalist Moral Hazard
by Donald Devine
Issue 129 - April 8, 2009

There is a great deal of talk these days about the death of capitalism. The banks, the central institution of capitalism, have had to be bailed from disaster. AIG, the largest insurance company, has received massive infusions of government money and is basically state run. The automobile industry, the largest part of the manufacturing sector, is government financed and verges on bankruptcy. An $800 billion stimulus package for thousands of private firms was passed with merely a murmur and additional firms demanding the same and more. Two trillion dollars in liquidity has been added by the Fed to make money dirt cheap, undermining the very soundness of capital.

Treasury Secretary Tim Geithner - still not satisfied - has asked for even more, to limit the risks all entrepreneurs may take, to monitor their actions, to rein them in if they act too aggressively and, if this fails, to manage their collapse. What is left of capitalist risk-taking if the government does it all?

How did America get to this point? Alexis de Tocqueville, the great social analyst of the U.S., predicted early on that given elections people would vote for a welfare state that would give them benefits that would increasingly make the public reliant on government, whose benefits would make them even more dependent and claim still more until they lacked the vitality to help themselves at all. There is remarkable agreement on left and right that capitalism grew out of the “vigor” of feudalism and its commitment to work and individual responsibility. To Karl Marx, in the same way the Middle Ages out-produced and surpassed the ancient regimes, capitalism built first on feudal energetic social relations, agriculture and manufacturing but then so rationalized production and freed trade that it “burst asunder” from feudalism and “created more massive and more colossal productive forces than all preceding generations together” to create a new era altogether, that of capitalism.

The rationalization of production that led to capitalism’ success then “piteously had torn asunder all the motley feudal ties” such as religion, family, honored professions, small business, localities, guilds and associations - undermining its foundations - leaving only big business, “naked self interest,” and “callous cash payment.” For a while these ties and especially religion as the “opium of the people” protected capitalism too but this protective cover wore away in the universal pursuit of money which overextended business so much that its very size produced inefficiencies that lead to labor-organized unions and political parties to challenge business, whose workers were ultimately joined by a critical group of perceptive businessmen and intellectuals who together finally will overthrow capitalism. From the perspective of the current crisis, this sounds almost prophetic.

More to the right, Austrian School Nobel Laureate F.A. Hayek even argues that the ties of European tradition and religion were the essential precondition to capitalism. They were especially necessary for the rise of the rule of law protecting capitalist freedom and property. Indeed, a free, capitalist society must “paradoxically” be based on tradition to legitimize privately held property and the freedom to hold and use it, although not necessarily precisely in the original form of Christianity. The Austrian Joseph Schumpeter even thought that capitalism might be the final stage of feudalism rather than a separate stage of development prior to socialism and, therefore, already in early decline by the mid-20th Century as shown by its then declining traditional beliefs and subsequently fettered market and declining energy and innovation.

A new book by Svetozar Pejovich, “Law, Informal Rules and Economic Performance,” raises this issue in the most systematic manner to date. Professor Pejovich basically sees historical religion in capitalist countries—overwhelmingly Christian or Buddhist-influenced Christian colonialism—from the opium of the masses perspective. The early Christian church is viewed as relying on force to gain and maintain its authority and Russian Orthodoxy is seen as a Czarist invention of social control. Still, he gives credit to early and Medieval Christianity for creating the conditions that gave rise to capitalism.

Pejovich documents four essential but not planned contributions of Christianity: it introduced individualism as a unique moral system, transformed work from a slave to a citizen responsibility, turned society from the extended to the nuclear family, and created the separation between church and state that lead to constitutional separation of powers generally throughout Western Europe. Christianity, first, taught an individualist rather than a communal obligation right from the beginning, something unique among world civilizations. At the very start Paul convinced Peter that church membership was not to be restricted to a particular people or by a set of communal ritual practices. Even earlier, Christ made redemption individual, for one lost sheep or a single coin or a prodigal son.

Second, Rome and most ancient civilizations considered work and especially physical labor as beneath the dignity of a true citizen, whose obligation was military, governmental or familial. The removal of the government from Rome to Constantinople—and with it much of the nobility and their slaves—allowed a change. But the direct improvement in the status of work came in the 6th Century at Monte Casino from Benedict’s rule of “labor and work” as the ideal regimen of social life. Not only were high-ranking men (and later women) recruited into the order but its influence on the value of work generally spread as did the monasteries themselves across all Europe.

Third, it was the extended family that dominated and was the base of power for Rome, Greece and other early regimes. Aristotle indeed named the science of economics after management of the home. All alliances were based on family ties and connections, which restricted private trading between strangers. But, also in the 6th century, Pope Gregory I voided four traditional practices that undermined the power of the extended family. He forbad marriage to close kin, marriage to widows of close kin, the use of adoption to transfer children for family advantage, and concubinage – all of which undermined the power of the patriarchal system, preparing the way for the modern striving nuclear family so necessary for the rise of bourgeois capitalism.

The final early Christian moral decision that prepared the way for capitalism was the undermining of the exclusive sovereignty claimed by the state since time immemorial. From its very beginning Jesus challenged this when he said to “Render to Cesar the things that are Cesar’s and to God the things that are God’s.” As early as the 4th Century the bishop Ambrose had refused an Emperor Valentinian order he believed adversely affected the church and, as Fareed Zakaria noted, allowing the Christian church to be the first institution in history to successfully defy state authority. By the 6th Century, Gregory VI proclaimed church/state separation as a doctrine which created separate clerical courts and, as Hayek noted, lead the way to nobles, cities, parishes, separate mercantile laws, guilds and other associations, and finally even commoners successfully claiming separate rights too.

Pejovich argues that all of these moral and institutional changes were essential in creating the rule of law and constitutional separation that allowed capitalism to rise and survive in Europe, especially in its common law nations. He presents data from the “Index of Economic Freedom” to demonstrate that even today all seven nations rated free and capitalistic in 2007 were common law countries, all of which had evolved it from Christian roots in Europe, including Hong Kong and Singapore which received it indirectly from English colonialism. Most of the next most economically free nations were Christian-rooted too, including Japan, which had also received its rule of law and consequent capitalism second-hand from the West.

Pejovich is not sanguine about creating capitalism where these roots do not exist. Few nations have become more capitalist in recent times and some that have, as in Eastern Europe, have since moved away. The commitment to limited government and rule of law has declined markedly even in Britain and the United States with the rise of the welfare state and its communal rather than individual work responsibility for welfare and economic activity generally. He does not mention it but the rise in modern concubinage in the form of serial marriages and divorce and other sexually liberalizing practices additionally undermine the nuclear family. Separation of powers too is threatened by the rise of national government power relative to local government and private institutions.

As much as the libertarian Pejovich recoils from it, he comes to the reluctant conclusion that the rule of law and separation of powers might have to be imposed by the state upon reluctant populations and then to allow freedom and the market to grow within these over time. As Ljubomir Madzar notes, however, this would constitute a “massive engineering venture” as difficult as regulating the market effectively, or even more so, and probably is unrealistic. James Buchanan’s hope that people will accept capitalism on rational grounds alone is probably unrealistic also given its lack of progress since first offered by Voltaire. As even the French skeptic himself asked of Rousseau, where does the necessary energy come from?

What about the U.S. and West where capitalism did take root? Might the weak support for capitalism today be the result of the decline of the Christianity that created it? The title of a recent large survey from the Study of Secularism program at Connecticut’s (nonreligious) Trinity College proclaimed “Christianity and Religion Decline in U.S.” The news stories all emphasized that the number of Americans identifying as Christian declined from 86 percent in 1990 to 76 percent in 2008, and those identifying as religious declined from 90 percent to 80 percent in the same comparison years. What received almost no coverage (although mentioned in the report itself) was that there was an intermediate study that showed almost no change in religious beliefs since 2001. The real news was that the decline in religiosity that actually did take place during the 1990s had halted by 2008.

The media likewise reported that only 70 percent of Americans expressed belief in a personal God, although an additional 12 percent said there was a “higher power,” 5.7 percent were “not sure” and 6.1 percent refused to answer the question. Yet, only 2.3 percent gave the atheistic answer “there is no such thing” and only 4.3 percent the agnostic response “there is no way to know.” Only 6.6 percent, then, actually said they were truly non-religious, hardly the decline secular intellectuals have been predicting.

Even that may exaggerate the decline. The 2008 Pew Center survey of religion found that one-fifth of self-described atheists paradoxically also said they believed in God. Moreover, only nine percent of Americans said they never pray or refused to answer whether they prayed, while 92 percent said they pray at least occasionally—presumably to someone or something. Even in Europe, the vast majority say they pray regularly even if they rarely attend religious services or think of themselves as religious.

On the other hand, it is clear that Christian beliefs and active participation in religious services and practices have declined. The real moral hazard for those already enjoying the economic benefits of capitalism in the West is that the decline of Christianity and the vigor it supplied might spell the end of its prosperity, as is already noticeable in Europe’s loss of belief and consequent extended economic and demographic stupor. As strange as it sounds to modern ears, capitalism only grew out of a Christian rule of law and separation of powers regime in Europe that later spread imperfectly worldwide; so – mirabile dictu - is it possible that Christianity or some similar religious commitment is the only plausible post-colonial, post welfare state road back towards freedom and capitalism?

It is interesting that as Europe and perhaps the U.S. move away from capitalism and religion, Christianity is spreading like wildfire in the rest of the world. Today, there are more Christians in Asia, Africa and South America than there are in Europe, North America and Australasia. As Europe sinks deeper into state welfare dependency, declining, aged and infirm populations, and entitlement bankruptcy, is it possible the third world might follow its Christianity into capitalism as did the West once upon an Easter long, long ago?

Donald Devine, the editor of Conservative Battleline Online, was the director of the U.S. Office of Personnel Management from 1981 to 1985 and is the director of the Federalist Leadership Center at Bellevue University.