By Edward Hadas
The leading theories of economics and finance are usually produced for the rich. Pope Francis deserves praise for suggesting an economics for the poor.
The typical criteria of economic success – such as efficient pricing, fully competitive markets and rapid GDP growth – sound uncaring. And they often are. One problem is that most of the leading theories have an implicit pro-rich bias. For example, the Capital Asset Pricing Model, a basic tool in finance, assumes that the rich investors who can afford to take big bets deserve extra-large rewards when things go well. Or consider how most governments’ economic policy aims first and foremost at GDP growth, basically ignoring the uncomfortable truth that the already rich typically take a disproportionate share of additional production.
By contrast, pro-poor concepts receive almost no attention. Mainstream thinkers rarely say that the rich people who have gained from the economy have an obligation of solidarity with the poor who have lost out. Most of them have never heard of the idea (common in Catholic circles) that private property comes with a “social mortgage”, a debt to the society which makes that property valuable.
I am not accusing the academics, or Wall Street for that matter, of intentional callousness. There are no plots to defend the ruling classes or to ignore suffering. Many economists have used the theories to justify anti-poverty programs. Still, standard economics has a pro-rich bias. I felt it acutely last month at a financial firm’s presentation of its latest investment thinking. A speaker explained that many of the firm’s billionaire clients thought emerging markets would underperform, so they were shifting funds out of them.