Last week Pope Benedict XVI published his latest encyclical, entitled Caritatis in Veritate. It will go down in history as one of the greatest encyclicals of the Catholic Church on the broad theme of social teaching. It is not possible to comment on it in a few hundred words. However, there are so many issues that were raised in it, that it is worth picking one of them to discuss it further.
The issues that the encyclical touches upon include inequalities, corruption and illegality, the interdependence among nations, intellectual property, the mobility of workers and deregulation.
There is one issue that provides a great deal of food for thought. It has to do with the profit motive. The profit motive has always been a fundamental issue in economic thinking as according to economic theory, profit is the earnings of capital, just as much as wages are the earnings of labour and rent is the earnings of land. Essentially without profit, there is no logical reason for someone to invest. On the other hand students of economics would tell you that according to the theory of perfect competition, firms only make normal profits (as they do not make any supernormal profits). The existence of supernormal profits is a consequence of speculative and/or monopolistic practices.
The application of such thinking in economic models has led to things like communism, where it was thought that the ownership of capital should be in the hands of the state in order to eliminate social and economic inequalities. In practice this was found not to have worked. However, we are now also coming to recognise that neither has its opposite worked. The financial meltdown of 2008 and the subsequent recession that the international economy has experienced and is still experiencing, has happened because badly regulated capitalism has not worked well.
The profit motive was seen to be the kingpin of a successful economic system and consumers and investors were generally thought to behave rationally in the pursuit of satisfying such a motive. This thinking has proven itself not to be correct. The Pope's encyclical touches upon this issue and comments that today's international economic scene is marked by grave deviations and failures and requires a new way of understanding business enterprise. It states that old models are disappearing, but promising new ones are taking shape on the horizon. Without doubt, one of the greatest risks for businesses is that they are almost exclusively answerable to their investors and their need to maximise profits, thereby limiting their social value.
Owing to their growth in scale and the need for more and more capital, it is becoming increasingly rare for business enterprises to be in the hands of a single controlling owner who feels responsible in the long-term, not just the short-term, for the life and the results of his company, and it is becoming increasingly rare for businesses to depend on a single territory. All too often the owners of companies today are not persons who have invested in a specific activity with a view to creating wealth for themselves and society, but persons that have access to capital and have invested with a view to simply earning more profit for themselves.
In this scenario the encyclical makes the point that there may (and should) be existing companies who are not guided exclusively by the profit motive but are also guided by the well-being of all stakeholders that contribute to their existence, such as customers, suppliers the employees and society at large. Such companies need not have a structure that is different from that of other business enterprises, be they partnerships, cooperatives, private limited liability companies or public companies.
It is not the structure that counts but the attitudes, aspirations and beliefs (in other words the underlying values) of the owners, the management and the employees. In this regard the values of the management and the employees are also critical as they are expected to adopt a responsible attitude in their work since they serve as the interface between the owners and the customers, suppliers and society. This in turn requires a responsible approach from the employees' representatives and mutual respect among employees. My experience is that in companies where there exist employees of different categories, in terms of job knowledge, academic background and nature of work, mutual respect among employees is not always present. The personal agendas of employees can be threatening to the life of business enterprises just as much as the relentless exclusive pursuit to maximise profits.
The encyclical of Pope Benedict XVI is well timed given the current international economic scenario. It has an immense value also on the local scene, as we seek to find solutions to our own economic problems, especially the need to safeguard jobs in an economic downturn.