The Economics of Loving Your Neighbor

Princeton University, Pace Center March 6, 2006

John D. Mueller Director, Economics and Ethics Program

Ethics and Public Policy Center

President,

LBMC LLC

Washington, DC

What is Economics About?

What do people do all day*?

“ Marrying and giving in marriage ” : distributing “ Eating and drinking ” : using (consuming) “ Planting and building ” : producing “ Buying and selling ” : exchanging *Luke 18: 27-28

A Brief, Remedial History of Economics

Economics has been taught continuously at highest university level since 13 th Century: Scholastic (AAA*) Economics: Classical Economic: Neoclassical Economics: Neoscholastic: * Aristotle and Augustine, integrated by Aquinas 1250-1776 1776-1870 1870-c. 2000 c.2000- ?

How the Structure of Economics Has Changed

Outline Theory Final Distribution Scholastic Yes Consumption (Utility) Yes Production Yes Equilibrium Yes Classical No Neoclassical No Neoscholastic Yes No Yes Yes Yes Yes Yes Yes Yes Yes

Augustine

’

s Description of Gifts and Crimes

1. All persons are motivated by love for some person(s).

2. Love means

willing some good to some person

(Aristotle)

.

3. We express our preferences for persons (e.g., love) by distributing our goods between ourselves and others.

Kind of love Inner Act Ordinate Benevolence Outer Acts toward

Self Others

Utility Beneficence (Gifts) Inordinate Malevolence Vice Maleficence (Crime)

Selfishness (assumed by Adam Smith and neoclassical economics) Gifts (express love) Crimes (express hate)

What does it mean to

“

love your neighbor as yourself

”

?

Since we naturally love ourselves, the purpose of the Two Great Commandments is to make our loves “ ordinate ” What

as yourself

means depends on whether the good is “ diminished by being shared, ” i.e., scarce (Augustine) If good is abundant, we can and must share it

equally

If the good is scarce, that ’ s impossible: loving your neighbor

as yourself

cannot always mean with

equally with

yourself “ Since you cannot do good to all, you are to pay special regard to those who…are brought into closer connection with you ” (

De doctrina christiana

1,28)

Distributive Justice

Analog to personal gifts for

common

goods: both are “ transfer payments, ” “ geometric ratio, ” (failure of communism) determined by practically limited by scarcity Violated by political

faction

(James Madison) A faction ’ s

ideology

(Hannah Arendt) creates a “ fictitious world ” Collectivists tend to reduce justice to distributive justice (as if all goods were common) Individualists tend to reduce justice to justice in exchange (as if all goods were personal)

Justice in Exchange

Product ’ s value (e.g., computer) = producers ’ income (labor and property compensation) Violated by

disequilibrium:

general inequality of supply and demand: e.g., unemployment, inflation/deflation Unemployment a function of labor ’ s after-tax, after-transfer share of total income (Rueff ’ s Law) Inflation/deflation: imbalance between demand for money and money supply

Basic Principles of Successful (and Popular) Economic Policy

General government should be funded by taxing labor and property income equally Transfers to persons (e.g., Social Security) financed by taxes on labor income; transfers to property owners (e.g., tax-free savings accounts) by taxes on property income Borrow only to fund government-owned investments Don ’ t finance government by creating money

How both parties violate the basic principles

Both fund general government with Social Security surplus (labor income): Democrats to keep spending high, Republicans to dole out tax breaks, for constituents.

Both rely on funding government with foreign dollar reserves, causing commodity inflation, chronic budget and trade deficits.

Republicans want to shift tax burden for general government from all income to only labor income (e.g., tax-free savings) Democrats want to subsidize Social Security (benefits for workers) with income tax and/or taxes on property income.

Income Shares Before and After Taxes and Transfers

Shares of National Income and Unemployment

Rueff

’

s Law

Components of U.S. Net Labor Cost

Labor Income, Shares of Actual & Potential Income

Actual & Projected Federal Spending

Year 2001 actual 2025 est.

2050 est.

2075 est.

Actual and Projected Total Fertility Rate

(5) (1) (2) (3) Total Fertility Rate (TFR) w/ projected benefit share at 2001 incomes Projected TFR with projected benefit share at projected incomes Projected TFR, same as (2) without legal abortion (4) Memo: TFR, SSA Trustees Intermediate Assumptions 2.05

2.05

2.05

2.05

SSA Low-Cost TFR SSA High-Cost TFR 2.05

(6) 2.05

1.98

1.92

1.87

1.87

1.73

1.60

2.51

2.35

2.22

1.95

1.95

1.95

2.18

2.20

2.20

1.74

1.70

1.70

Actual and Projected Net Labor Cost and Unemployment Rates

Social Spending and Fertility

National Saving and Fertility

Worship and Fertility

Fertility: Predicted vs. Actual