Hey, Pope Francis: Markets are the solution, not the problem

Pope Francis continues to make waves as the new head of the Catholic Church, offering a blistering critique this week of free markets and capitalism in his first apostolic exhortation:

He claims income inequality is a result of ideologies which reject the right of states to exercise control:

And he claims that the system of capitalism tends to devour anything that stands in the way of increased profits:

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The Pope’s suggestion that the market is being "deified" suggests that he sees markets as competing with God and religion. Belief in God and participation in organized religion is falling worldwide. If the Pope sees the market and material prosperity as being a factor in displacing God’s role — not to mention the Pope’s — in society, then it is not surprising that he might wish to steer his flock away from it.

But I don’t think there is any essential conflict between religion and the market. The market in itself is not an ideology or a cosmology. It does not attempt to answer difficult existential or religious questions like: "What is the meaning of life?"

The market is a tool for people to express their economic wants and needs by buying and selling. People develop skills to create goods and services that other people in the market want. People buy the things that they want to buy. This is an important feedback mechanism, because it allocates resources based on people's wants and needs. This means that spenders throughout the marketplace have ultimate power. It also means that people have incentives to innovate and experiment to create better products to win market share.

A free market economy does not have to mean a highly unequal society — evidence suggests that democracies can successfully reduce economic inequality by redistributing income. Nor does it have to mean environmental armageddon — states can create disincentives to pollution and environmental destruction by taxing or criminalizing such activities. Such regulation is actually a fundamental aspect of the free market economy, because the market is always a product of rules established by the state — property rules, contract law, tax rules, labor regulations.

No doubt, market participants sometimes make crazy, irrational decisions, which is why we see bubbles, stock market crashes, and economic depressions in which people can stay unemployed for years. Sometimes corporations use money to buy government support to protect themselves from competition. Sometimes people can be selfish, and blind to the plight of others poorer than themselves. Sometimes the regulators charged with establishing rules to ensure a free and open market fail to do their job.

But the rise of global markets has lifted an enormous number of people out of poverty. A 2012 World Bank report found that 1.29 billion people in 2008 were living in extreme poverty on an income below $1.25 a day. By contrast, in 1981, 1.94 billion people were living in extreme poverty. That’s a difference of 700 million people — not too shabby.

Poverty rates started to fall towards the end of the 1990s as growth accelerated in developing countries, from an average annual rate of 4.3 percent from 1960-2000, to 6.0 percent from 2000-10.

Contrary to the Pope, global income inequality is getting narrower not wider, as more countries industrialize. More people own cars than at any point in history. Thirty-nine percent of people around the world now have internet access — with the education and communication benefits that brings — compared to just 23 percent in 2008. Sixty-one percent of people had access to sanitation in 2008, compared to only 49 percent in 1990. Between 1990 and 2012 global child mortality fell to 48 deaths per 1000 births, from 90 deaths per 1000 births.

This doesn’t mean that markets are perfect systems, or that they are the end of history. But the historical record suggests that states charged with vigilance for the common good should establish market economies.