Can Judaism Save Capitalism?

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imageby R. Gil Student

Eric Cohen’s impressive argument for a uniquely Jewish conservatism includes a long section on economics. Quoting R. Jonathan Sacks and Dr. Isaac Lifshitz, Cohen makes a case that emerges from Jewish sources for Free Market Capitalism. However, as Yuval Levin points out in his response to Cohen, Judaism is consistent with capitalism but does not necessarily advocate for it. Yes, the Torah protects property rights and advocates productive labor, but there is more to capitalism than earning a salary and keeping it. [1]I disagree that Judaism encourages competition. Torah teachers are a unique exception to the regulations of hasagas gevul that prevent ruinous competition. What role, then, can Judaism play in economic ideology?

Levin seems to think that Judaism has little to teach the world about capitalism. I suggest that while Judaism may not advocate a specific economic theory that developed a dozen centuries after the close of the Talmud, it can teach the world how to properly implement it. This is a particularly timely task because recents events emphasize how desperately capitalism needs direction.

It is one thing to wax passionately about free markets in theory. Getting down to the nitty-gritty implementation is quite another. Free markets require regulation to prevent abuse, such as monopolies and corruption. As we have seen multiple times over the past century, such as in Russia over the past two decades, free markets without sufficient protection will not remain free for very long. The rich and powerful grab control and become richer and more powerful. Some argue that, to a lesser degree, this has happened throughout the free world as income inequality grows and the wealthiest few keep awarding themselves higher salaries and oversized bonuses while under- and unemployment stubbornly persist.

The 2008 Economic Downturn nearly destroyed Capitalism. While financial watchdogs propped up the global economy at exorbitant cost, the vast majority of people suffered unemployment, loss and financial uncertainty. Mistrust of Capitalism grew to catastrophic proportions. If not for the comical ineptitude of the Occupy Wall Street movement, the financial system as we know it may have been overthrown. Despite this revolutionary failure, a new generation is rising that fears Capitalism and distrusts free markets. What could not be accomplished through revolution may yet be achieved through legislation. The inherent unfairness of Capitalism, the growing visibility of income inequality, may spark angry legislation disturbing the free markets.

The salvation of Capitalism lies in redeeming it through morality. The proponents of free markets need to claim the language of morality to define Capitalism’s scope and limitations. Everyone agrees that a free market needs adequate regulation to protect it from the inevitable would-be abusers. We can save Capitalism by defining it through its regulation in terms of morality, of right and wrong.

Economists make policy recommendations, which if approved become required by law, based on the expected social and economic impact. One main approach is called Welfare Economics, which measures the benefit to the public of proposed regulations (it has no connection to the Welfare System). This is a purely pragmatic evaluation emanating from a consequentialist view of right and wrong. If a policy has positive economic consequences, it should be implemented.

Judaism rejects this entire approach to governance. Free markets should not be ruled by cost-benefit analyses but by objective rules of right and wrong, good and bad. Rabbi Aaron Levine dedicated his career as an economist to arguing this point, which he most clearly expressed in the introduction to his posthumously published Economic Morality and Jewish Law. Welfare Economics can lead to absurd results, such as the argument that toxic waste should be dumped freely in less-developed countries. The world needs a deontogical approach, an ethical system with which to evaluate policy proposals based on their merit, not just their consequences. For R. Levine, this basis is Halakhah, Jewish law.

It might seem odd to argue that an ancient ethical system, sometimes accused by critics of being immoral (although usually from a superficial analysis), to lead the way. But we are talking about much more than a PR strategy. We need a systemic overhaul of the way we think and speak of economic issues. Free Markets must become a moral issue and its policy decisions made based on what is right and wrong. For its part, Halakhah can only guide modern economies if it is taken out of the pre-modern world. Decisions must be made based not only on a deep familiarity with the rules and concepts of Jewish tradition but also expertise in contemporary economics. When the two fields are married, as a number of outstanding scholars have accomplished, we find a remarkable union that offers insight into the fine details of economic policy, the small decisions that cumulatively grease the wheels of free markets.

R. Levine compares Welfare Economics and Halakhah in many cases. For example, deceptive advertising damages customers and is therefore subject to regulation. However, when an advertiser lies about prices, it is rarely penalized because regulators believe that a focus on price ultimately leads to lower prices, i.e. it has a positive consequence for customers. In contrast, Halakhah forbids falsehood and therefore, if implemented in regulation, would ban ads that provide incorrect price information. Judaism teaches that the rule of honesty should prevail in the marketplace, not just an economically or socially useful honesty.

Similarly, insider trading can be debated based on the impact to stock market participants. Does it improve market efficiency by providing incentive to insiders to manage better or does it allow for quick gain that leads to poorer management? For R. Levine, this consequentialist thinking is beside the point. The inside information belongs to the company and Halakhah forbids profiting from someone else’s property. Economic policy should be determined by rules governing what is right, not predictions of likely outcomes and their corresponding benefits. Being right means doing right, not doing whatever it takes to reach a useful end.

In his response to Cohen, Levin writes that he can see Judaism playing a role of moralism in a Jewish conservatism but what can the religion offer in the economic realm? While he was looking for a Jewish theology of entrepreneurship, he already had his answer. Capitalism desperately needs a strong dose of economic morality. Regulation based on morality would prevent some of the immoral incentives that led to the recent economic downturn, many of which still exist. It would demand incentives that foster responsibility and long-term thinking, regulate executive compensation packages to serve shareholders and demand responsibility from corporate boards that cannot be quickly passed on to insurers.

An implementation of Capitalism based on economic morality would not engage in the class warfare that is rampant among social policy advocates, nor accept dubious predictions common among consequentialists. Competing notions of social engineering are beside the point. The focus on effective regulation is the morality of a given action–is it inherently proper?

Jews should be morally invested in the implementation of meaningful economic regulation that requires proper behavior of all parties. Capitalism can only survive if it continues to inspire hope. To do this effectively, it must adhere to basic rules of fairness and right and wrong.

Endnotes

Endnotes
1I disagree that Judaism encourages competition. Torah teachers are a unique exception to the regulations of hasagas gevul that prevent ruinous competition.

About Gil Student

Rabbi Gil Student is the Editor of TorahMusings.com, a leading website on Orthodox Jewish scholarly subjects, and the Book Editor of the Orthodox Union’s Jewish Action magazine. He writes a popular column on issues of Jewish law and thought featured in newspapers and magazines, including The Jewish Link, The Jewish Echo and The Vues. In the past, he has served as the President of the small Jewish publisher Yashar Books and as the Managing Editor of OU Press. Rabbi Student has served two terms on the Executive Committee of the Rabbinical Council of America and currently serves as the Director of the Halacha Commission of the Rabbinical Alliance of America. He serves on the Editorial Boards of Jewish Action magazine, the Journal of Halacha and Contemporary Society and the Achieve Journal of Behavioral Health, Religion & Community, as well as the Board of OU Press. He has published five English books, the most recent titled Search Engine volume 2: Finding Meaning in Jewish Texts -- Jewish Leadership, and served as the American editor for Morasha Kehillat Yaakov: Essays in Honour of Chief Rabbi Lord Jonathan Sacks.

11 comments

  1. Rav Aharon Lichtenstein z”l wrote a masterful article, published in Hebrew in the early 1970s, and available in translation here – http://www.vbm-torah.org/alei/16-02sedom-final.doc – that concludes: “In the framework of Halakha, there is almost no trace of the recoiling from private property found in the writings of a number of Church fathers. The idea has an important, even central place in many realms – from marriage to offerings, from bikkurim to lulav, and especially in eiruv techumin – not to mention, of course, the realm of monetary laws. Never, however, does Halakha idolize this concept, and other moral demands are liable to bring about its restriction. If Halakha is very far from Proudhon’s declaration that “private ownership is theft,” on the other hand, it refuses to agree with the popular adage that “an Englishman’s home is his castle.””

  2. With all due respect to the rabbi, I believe many of his recommendations are based on mistaken notions concerning economic theory. For example:

    “As we have seen multiple times over the past century, such as in Russia over the past two decades, free markets without sufficient protection will not remain free for very long.”

    On the contrary, the problem in Russia was that the markets were NOT free. As Maxim Boycko, Andrei Shleifer and Robert W. Vishny show in Privatizing Russia (MIT Press, 1997), the problem in Russia was that there was too much regulation. These regulations created cartels and monopolies, granted subsidies to government cronies, and insulated them from competition. The problem was not that markets were too free, but that they were not free enough. The government protected its cronies from competition.

    “The 2008 Economic Downturn nearly destroyed Capitalism. While financial watchdogs propped up the global economy at exorbitant cost.”

    Yes, meaning that government regulations socialized costs and created moral hazard. The economic downturn was caused by the perverse incentives created by government regulation.

    “Regulation based on morality would prevent some of the immoral incentives that led to the recent economic downturn, many of which still exist.”

    Once again, the immoral incentives were created by the government.

    “Everyone agrees that a free market needs adequate regulation to protect it from the inevitable would-be abusers.”

    No, not everyone agrees with this. Many argue that regulations are generally the cause of abuse, not the solution. See e.g. the literature on rent-seeking (Tullock, Krueger) and the interest-group theory of regulation (Stigler, Posner, Peltzman). Basically: politics encourages the concentration of benefits on well-informed minority interest groups and the dispersal of costs across ignorant majorities. The ignorant majority is taxed or regulated in such a way as to benefit the well-informed minority. The minority interest groups will lobby for subsidies and regulations which protect them from competition, and the political class will oblige, because in general, a well-informed minority is a better source of votes and campaign funds than an ignorant majority.

    “deceptive advertising”

    No free-marketer opposes laws which ban deceptive advertising. But it is worth noting that many of the advertisements which Rabbi Levine considered to be deceptive, are not really deceptive at all. See e.g. F. A. Hayek, “The Non Sequitur of the ‘Dependence Effect,'” Southern Economic Journal 27, no. 4 (1961). Neoclassical economists – include Rabbi Levine – tend to identify as deceptive any advertisement which is not as dry and technical as an engineering manual. But in fact, advertisements are meant to excite and arouse curiosity, and they often rely on exaggeration or satire. Consumers know this. When an automobile company advertises their new car using women in bikinis, the Neoclassical economist condemns this as deceptive, but consumers are not as stupid as the economists think they are. If advertising is deceptive, so is any form of humor, satire, or fiction. In fact, anything but the driest non-fiction is deceptive by this standard.

    “The inside information belongs to the company and Halakhah forbids profiting from someone else’s property.”

    But then insider-trading should be banned by the company, not the government. A company is will within its PRIVATE PROPERTY rights to forbid its employees from using company property in certain ways. But this does not give the government the right to ban insider-trading. The government is not a party to the affair, and it should excuse itself from matters which are none of its business. The matter of insider-trading ought to be dealt with from inside the company.

    • “I disagree that Judaism encourages competition. Torah teachers are a unique exception to the regulations of hasagas gevul that prevent ruinous competition.”

      As Meir Tamari shows (With All Your Possessions, In the Marketplace), hasagat gevul only forbids competition in very narrow circumstances. Essentially, competition is forbidden when it will bankrupt the incumbent and when the new entrant is relying on some unfair advantage which no one else can match. For example, the entrant has a tax exemption which the incumbents lack. In general, then, Judaism almost completely approves of unlimited competition. Competition is restricted in only a few isolated corner cases. Aaron Levine paints a similar picture of Judaism’s competition laws.

  3. R’ Michael,
    There’s certainly much debate concerning the “proper” scope and force of regulation in a free market society. I think the take away here was that free markets, with halacha defining “proper” are the most closely aligned with the Torah’s view of a halachic society.

    • Joel, okay, I can live with that.

      But I would insist that halakhah pay attention to what economic science says are proper regulations, the same way that Orthodox doctors pay attention to modern medical science. Modern economic theory has a lot to say about which regulations are effective (or not) at accomplishing different objectives.

  4. As a libertarian, I’d love to believe that the Torah supports free markets. But what about the prohibition on interest?
    .
    For R. Levine, this consequentialist thinking is beside the point. The inside information belongs to the company and Halakhah forbids profiting from someone else’s property.
    .
    But isn’t that the question? Does the company really “own” the information? Ownership rights have costs to enforce, so the question is whether or not it is useful to create such a right.

    • You mention interest, someone else raised hasgas gevul limiting competition.

      Ona’as mamon, the right to reneg on a deal that you didn’t know was over- or under-priced by 1/6 away from market value, means that there are halachic limits on how rapidly prices are allowed to change.

      • Ona’ah does not apply to the nosei b’emunah, the person who reveals the price discrepancy.

        Furthermore, Itamar Warhaftig has argued that ona’ah does not apply anymore because there is no such thing as “the” price of anything. Ona’ah forbids prices from deviating more than 1/6 from “the” price, but when there is no such thing as “the” price, then it is impossible to enforce ona’ah.

        http://www.jlaw.com/Articles/price_wage_levels.html

        http://www.jlaw.com/Articles/price_fraud.html

        So Warhaftig: “[I]n a completely free market, where every merchant has his own price[, t]here is no market price, and therefore no ona’a.”

        So ona’ah does not apply in a free-market.

        • Tell that to commodities traders.

          • But the pricing information is public. The purpose of ona’ah is full-disclosure, and so a person is assumed to waive his rights to ona’ah when the other person discloses information. Since there is already full disclosure in the nature of a commodities market, every commodities trader is automatically a nosei b’emunah.

            Plus, one of the purposes of a commodities market is to exploit price-differentials. So we can assume every commodities trader waives ona’ah because that is the essence of being a commodities trader.

  5. ” Welfare Economics can lead to absurd results, such as the argument that toxic waste should be dumped freely in less-developed countries.” The economic argument was that it might make sense to dump toxic waste in less-developed countries, provided that these countries are appropriately paid. I agree with that formulation: less-developed countries have much bigger problems than small amounts of toxic wastes, and money may help begin to fix many of their problems .

    The argument against capitalism in its U.S. formulation is not just that’s not a free competitive market (because of the influence of the rich), but probably more important that it doesn’t sufficiently redistribute. Classical welfare economics argues for competitive markets, in conjunction with redistribution.

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