It is interesting that we have been presented with a gift of sorts. This writer stated in another place that Popes do not reveal their sources. In the case of Pope Benedict XVI, we have an indication from what intellectual tradition he approaches economic problems. In 1985, in a symposium in Rome entitled, “Church and Economy in Dialogue,” Cardinal Ratzinger (at the time) gave a talk, “Market Economy and Ethics. Looking at this document gives many insights into the approach he takes in Caritas et Veritatis.
Ratzinger begins his talk by describing the economic state of the world in the same way as Pope Pius XI described the world in Quadragesimo Anno. To Ratzinger, the world is in terrible economic shape, especially when you consider the differences between the northern and southern hemispheres. He says that this situation poses such a threat “no less real than that “proceeding from the weapons arsenals with which the East and West oppose one another.” He states that all methods used to remedy the situation have been ineffective. In fact, according to the Cardinal, “the misery in the world has increased in shocking measure over the last thirty years.” This is much too general a statement to make much of, but some checking of data leads us to question this assertion. Speaking of the southern hemisphere, in Latin America for the period to which he refers, the trend has generally been upward economically, despite some dips in some countries, and stalling in Haiti. Africa,on the other hand, is illustrative. Northern Africa is developing well,but sub-Saharan Africa does poorly. But this is no mystery, and many economists have the solutions for this state of affairs, but hardly anyone listens. The main point here is that the world was not doing as bad as Cardinal Ratzinger supposes. Some keys to his point of view come from the rest of the article and his admitted source.
Ratzinger says that following Vatican II, it was held that the separate disciplines had their own autonomy and should be allowed to operate according to their own laws. He seems to be saying that this idea was not developed by the official Church, but came from outside official channels. The problem with this notion is that Vatican II actually states this in a number of places.And it is also true. Etienne Gilson once said that if you want to use chemistry for God’s sake, you must learn if for its own sake. But the Cardinal criticizes this. He takes the case of Adam Smith who, he says,believed that the market operates on its own and “moral considerations imposed on it from without.” The Cardinal says that according to Smith,“this position holds that the market is incompatible with ethics because voluntary ‘moral’ actions contradict market rules and drive the moralizing entrepreneur out of the game.” But Smith holds no such thing. Adam Smith was a professor of moral philosophy, and prior to writing The Causes and Consequences of the Wealth of Nations, he wrote The Theory of Moral Sentiments. In the latter book, we see Smith on the cutting edge of a phenomenological idea of morality based on empathy. Empathy can only take place between human beings because we share a common nature. In addition, Smith obviously assumes moral behavior on the part of the actors. The whole free market economy is based on trust, and it very short-sighted to ignore this obvious fact. Moral actions do not contradict market rules, they are the foundation of successful market functioning. When people are immoral in their actions, the market gets skewed. No one in their right mind, economists included, thinks that Bernie Madoff is the ideal market participant. Law itself, going payback to English common law, has prohibitions against fraud, outright deception and coercion. It is said by business experts that on average a customer who does not get treated well in a store will tell over 40people about the experience. Those folks will tell others, and on and on. Why? Top of the list is moral outrage in not being treated according to the dignity that one deserves. After this comes the desire of the offended person to warn others about the offending place of business. In both these cases, both morality and the laws of economics operate as a check on the entrepreneur, who is punished but shrinking sales. It is very likely, unless the merchant in question was just having a bad day, he has treated others like this, or presented them with faulty merchandise or bad service and the like. This means that the reputation of the place of business will be blackened.
But let us take this one step further. Cardinal Ratzinger reveals his source of this thinking—Peter Koslowski. Peter Koslowski is a philosopher who is primarily interested in propagating the discredited German Historical or Romantic Schoolof economics. Most of the references in Cardinal Ratzinger’s speech are from works by Koslowski. He quotes Koslowski: “The economy is governed not only be economic laws, but is also determined by men . . . .” Not only is this statement so obvious it is laughable, but it also reveals an ignorance of economics which is astounding. Ratzinger sees free market economists as picturing the market in a purely mechanical way: “[I]t is deterministic in its core. It presupposes that the free play of market forces can operate in one direction only, given the constitution of man and the world, namely, toward the self-regulation of supply and demand and toward economic efficiency and progress . . .. man is completely controlled by the binding laws of the market.” He also asserts that these economists hold that the forces of the market always work for the good, despite the morals of the individual participants.
Nothing can be further from the truth. What Cardinal Ratzinger probably has in mind is the methodology of the neo-classical economists, whose use of mathematics creates more of an engineering-like economics rather real world economics. Some years ago this writer heard a lecture by an Austrian school economist who quoted a neo-classical economist who admitted that the neo-classical economists were more in love with their mathematical models than with economics to the extent that they frequently do not care if the models reflect reality. Even so,economics is a science because there are regularities the behaviors of the vast majority of human beings such that we can with some accuracy gauge what the individual person will do under some specific conditions, ceteris paribus. The reason that economics is a separate science is that it studies human action, especially in the fields of exchange (but not always). People generally do what they think betters their conditions, and will act accordingly. Ethics is a separate science from economics because it deals with a different aspect of man. It is a science of the acts of the deliberative will of man as they are ordered to his ultimate end—happiness. Aristotle tells us that all men choose the good, meaning that no one intentionally chooses an evil as evil. Men go wrong when they choose an apparent good rather than a real good. It is the job of moral science to direct man to choices that bring him closer to that ultimate end. It is the job of the science of economics to tell us what men do, not what they should do, and to show what actions and choices will bring us a better material conclusion. Ultimately, both sciences,moral and economic, focus on the human person. Both are part of the practical reason. Moral science tells the person which actions bring him closer to his end, economic science has the more modest end to showing him how the world works so that the can take of his material needs, so that he can move on to better and higher things, like education and charitable acts. Man is not a disembodied spirit, but acts with his whole being, thus the necessity of acting in the world that exists, but never unethically. Economists never say that a person is allowed to act unethically in the real world. They do say that people do act unethically. They also show that sometimes those unethical actions have deleterious repercussions in the world of business.
Studies have shown that the two most religious type of persons in the United States are, aside from clergy, military personnel and business executives. Is it likely that the percentage of unscrupulous persons in business is higher than in other fields, such as medicine, sports, law or the clergy? Not likely, if you believe with St. Thomas that we share a common nature. If you are a German Historical School economist, you have nominalist tendenciesand do not believe in a common human nature, and believe that everything is historically and culturally conditioned. Hence, like Rousseau, you believe that evil is caused by external, societal forces. Therefore, the tendency of these German thinkers to blame the free market system for the evil actions of men in the system, and the economic decline that the west is currently experiencing.
Such thinking is not defensible from the Catholic or the scholastic point of view. All persons are obliged to develop the cardinal virtues,prudence, justice, fortitude and temperance in whatever situation they find themselves in. Moral failures are not caused by the system;immorality resides in the human heart.
This talk appears in http://www.acton.org/publications/occasionalpapers/publicat_occasionalpapers_ratzinger.php?view=print. All quotations are taken from this version.
 Italics are the present author’s.
 See, James A. Dorn, Steve H. Hanke, and Alan A. Walters, The Revolution in Development Economics (Washington,D. C.: Cato Institute, 1998, and the very full bibliographies at the end of each chapter; and Edward L. Hudgens and Bryan T. Johnson, “Why Asia Grows and Africa Doesn’t,” http://www.heritage.org/Research/AsiaandthePacific/lg756.cfm, accessed 10/29/09.
 See, for example, Apostolicam Actuositatem, #7; Gaudiam et Spes, # 34 and #36.
 Compare with Edith Stein, The Problem of Empathy, trans. by Waltraut Stein (Washington, D. C.: ICS Publications, 1989).
Fora full discussion of the German Historical School and its romantic roots, see William R. Luckey, “Romanticism: The Ultimate Source of Misguided Views on Economics.” Unpublished manuscript. See, also,Peter Koslowski, ed., The Theory of the Ethical Economy in the Historical School: Wilhelm Roscher, Lorenz von Stein, Gustav Schmoller,Wilhelm Dilthey and Contemporary Theory (Berlin: Springer-Verlag, 1995), and Peter Koslowski, ed., The Theory of Capitalism in the German Economic Tradition: Historicism, Ordo-Liberalism, Critical Theory Solidarism (Berlin: Springer-Verlag, 2000).
See, Ludwid von Mises, Human Action: A Treatise on Economics Third revised edition (Chicago: Henry Regnery Company, 1963), Introduction and chaps, I-VI.
William R. Luckey, “The Intellectual Origins of Modern Catholic Social Teaching on Economics: An Extension of a Theme of Jesús Huarta De Soto” Austrian Scholars Conference, Auburn University, March 23-25, 2000.
Pontifical Council for Justice and Peace, Compendium of the Social Doctrine of the Church (Washington, D. C.:United States Conference of Catholic Bishops, 2005), sect. 117.
You can visit his blog entitled Catholic Truths on Economics at: http://www.drwilliamluckey.com/