Economic Theory, Catholic Social Thought and the Common Good*

Charles K. Wilber

University of Notre Dame

*"Contributions of Economic Theory to an Understanding of the Common Good

in Catholic Social Thought" in Empirical Foundations of the Common Good, Daniel K. Finn, editor (New York: Oxford University Press, 2017), pp. 114-141.

This paper is in response to the twofold question posed by the organizers of the conference on Empirical Foundations of the Common Good: "Given what you know empirically and theoretically from your disciplinary perspective, what is the common good and how do markets help or hinder it?" This was further clarified by the question: As an economist what aspects of your field are conducive or detrimental to achieving the common good seen as human flourishing? This is a complex task for a number of reasons. Any conception of the common good covers a wider area than just the economy; further, economics as a discipline has to be distinguished from the actual workings of the political economy. I will focus on three issues in this paper. First, I will outline the conception of the common good found in Catholic social thought and then as an economist try to flesh out its meaning to me. Second, I will explain some of the ways that economic theory can be useful to policy makers in attaining that common good. Third, I will suggest some practical changes to the way the actual economy operates.

To understand the common good and the economic problems that keep us from attaining it, we need to realize that the economic system is a human creation. As such it solves certain problems for us while creating others. Two facts stand out from an examination of the history of market economies. They have been successful in producing amounts of goods and services unprecedented in history; and they have done so in a temporally and spatially uneven manner, i.e., market driven development has proceeded very unevenly between countries, and among regions within countries. Market systems developed both North America and South America, but one more so than the other. Certain countries and regions became dynamic centers of development while others stagnated on the periphery. Then the process shifted, and once growing areas stagnated and stagnant ones developed. And, of course, development has proceeded cyclically through booms and busts in each country and region. This process extends to individual industries and even households. These imbalances have been a natural part of market driven development.

One of the great economists of the twentieth century, Joseph Schumpeter captures the positive side of this dynamic process in his concept of "Creative Destruction":

The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers' goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates....[These developments] incessantly revolutionize the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.^{^[1]}

While this is insightful, it is scant solace to the skilled worker thrown out of a job or the town which progress left behind. So the strengths of the economic system are also its weaknesses. The great economic debate in the U.S. has been and still is: Can the destructive side of markets be mitigated while doing minimal damage to the creative side? Free market advocates say that there is no alternative to allowing the "natural" laws of the economy to work themselves out. Attempts to reform the market system, or even worse to replace it, will only cause greater harm. The counter argument is that, in fact, markets can be reformed, though for the reforms to be effective they must take into account the dynamics of the system. This is the stance of most economists today.

Many steps to affect the economy can be taken by a variety of actors: individuals, unions, corporations, churches, neighborhood associations, and other mediating institutions. Government as a social institution must also play an important role. Clearly not all government actions are positive, but government can be an important instrument wielded by men and women to attenuate the effects of the destructive side of market operations.

In the next section I briefly outline the concept of the common good used in Catholic social thought and then using my approach to economics, I describe the common good as human flourishing. Then in the following section I outline the equivalent concept in economic theory and argue a/ that treating the economic concept of externalities as ubiquitous can result in policies that promote human flourishing and b/ that scholarly work in economics recognizes that under conditions of interdependence and imperfect information, rational self-interest frequently will lead to socially irrational results unless that self-interest is constrained somehow.

The following two sections deal with specific ways that the actual economy can be changed to better promote the common good: a/ I deal briefly with the prospective role of worker shared ownership in promoting the common good and b/ I outline a critique of Gross Domestic Product and recommend that it be replaced by an accounting system that more accurately measures the well being of society. I conclude with a summary of my answer to "what is the common good?".

Common Good Conceptions Compared

The Catholic common good concept is rooted in a communitarian vision of society.[2] Because of this it emphasizes both the dignity of the human person and the essentially social nature of that dignity. Therefore, both civil and political liberties on the one hand and social and economic needs on the other are essential components of the common good.

The common good is central to the social encyclicals and pastoral letters that make up Catholic social thought. Concern for the effects of the economy on the lives of millions of human beings led to their issuance. For example, the Bishops' pastoral letter[3] argues that, because each person is made in the image of God, concern for human dignity in social solidarity is at the core of Christian faith. Because economic institutions and policies have a major impact on human dignity they are not only technical but moral concerns as well. Therefore, the Bishops argue, every perspective on economic life that is human, moral and Christian must be shaped by three questions: What does the economy do for people? What does it do to people? And how do people participate in it?[4] In addition, the Bishops argue that in pursuing the common good special concern must be given to the economy's impact on the poor and powerless because they are particularly vulnerable and needy.[5]

As an economist, it is my task to put flesh on these theological bones. Following the work of Denis Goulet,^{^[6]} I would specify three indicators of successful economic performance that should be part of the common good. The first is what Goulet calls "life‑sustenance"-- which corresponds generally to what we call basic material goods‑‑ adequate food, water, housing, clothing, education, and health care. It is worthwhile to differentiate among three types of goods. The first are these basic material goods. The second are "enhancement goods," which make life more vital, more interesting, more worth living, such as music, various forms of entertainment, some household goods, and so on. The third are commonly known as luxury goods. Driving a Cadillac instead of a Chevrolet, buying a marble‑topped table instead of a wooden one, and walking on a llama rug instead of polyester are all instances of consuming luxury goods. Most would agree that basic needs must be met and that enhancement goods are worthy of pursuit. There is less accord on luxury goods

There are various reasons to doubt whether higher levels of income and consumption beyond a basic life-sustenance necessarily increase wellbeing in terms of people’s utility, satisfaction or happiness. A study by Scitovsky found that the simple increase in the amount of consumption in the U.S. has not increased peoples' happiness.^{^[7]} Relatively recent empirical work – including the pioneering contributions of Easterlin[8], and subsequent work by Oswald[9], Deiner and Oishi[10] and Frey and Stutzer[11], among others – suggests that in fact people may not be better off as measured by happiness and satisfaction indicators (from survey evidence) when their income or average income increases. Time series data for individual countries do not reflect significant (and in some cases any) increases in the average level of self-reported happiness over time, despite significant increases in income and consumption. This is also true for the United States, where happiness levels have fluctuated without any upward trend despite significant increases in real income and consumption over several decades, and also for Japan, where in a period in which per capita income increased rapidly, the average level of happiness showed hardly any change. Data on specific individuals over their lives suggest that despite experiencing increases in income and consumption, these individuals usually do not show significant increases in self-reported happiness. Cross-sectional studies across countries suggest that countries with higher levels of per capita income and consumption do not have higher average levels of self-reported happiness beyond a certain level of income and basic consumption which is far below the income of the rich countries of the world. Even individuals who win lotteries have been found to report no greater happiness after a few years. To be sure, there is some support for the consumption-happiness connection. Cross-sectional studies within countries seem consistent with it: people in higher income groups with higher levels of consumption report higher levels of self-reported happiness than people in lower income groups; it seems that it is better to be rich than poor in a particular society at a particular point in time. Cross-country studies suggest a positive income-happiness link at low levels of income, up to the point where basic needs are met, and, some have suggested, even at higher levels of income. A few studies find that in some cases people are happier – even if temporarily – if their consumption and income increases. However, the bulk of the evidence seems to contradict the income-happiness relationship.

A second component of human flourishing found in most societies is esteem and fellowship. The social system should provide a sense of worth, of dignity to its citizens. One's goods can be a measure of societal esteem, but surely there are other important elements. The institutions in which citizens work should support them physically and give them a sense of belonging and of contributing to an important undertaking. Society should have clubs, churches, or other entities which support the individual. If the family is the basic social and economic unit, as is the case in the United States, the economy should provide support and encourage in families a sense of self‑esteem that can help sustain them. Another term for this is fellowship; this implies an element of equity among citizens. No modern society could provide esteem or fellowship which gave minimal income to most of the population, but fabulous wealth to a few families. Equity, of course, does not necessarily mean equality, but it does mean that there be some consensus regarding the justness of the distribution of wealth and income.

The third component of human flourishing in the economy is freedom. However freedom is a difficult goal to specify clearly. It obviously does not mean that all individuals may do whatever they wish, for that would be anarchy and the death of society. At its weakest, an increase in freedom means that the range of options open to the individual or the group has increased, that there are more choices available. This has its physical side in choice of goods, but it can also operate in other spheres such as the political or religious.

Stefano Zamagni elaborates a concept of freedom, drawn from Catholic social thought, that is necessary for human flourishing:

Freedom has three dimensions: autonomy, immunity and empowerment. Autonomy has to do with freedom of choice. Immunity has to do with the absence of coercion. It is, in brief, the negative freedom (that is to say the "freedom from") cited by Isaiah Berlin. Empowerment, in the sense given to it by Amartya Sen, has to do with the capability to choose - that is to say to reach goals that are set, at least in part, by the person himself. One is not free if one is never (at least partially) able to fulfill one's own life plan.[12]

Economic theory focuses primarily on autonomy and immunity while neglecting empowerment. Human flourishing requires all three dimensions of freedom. The Bishops' three questions: what does the economy do for people, what does it do to people, and how do people participate in it, incorporate these three dimensions of freedom.

How Can Economics Serve the Common Good?

Economic theory is rooted in an individualist conception of society. Society is seen as a collection of individuals who have chosen to associate because it is mutually beneficial. The common good is simply the aggregation of the welfare of each individual. Individual liberty is the highest good and traditional economic theory attempts to provide a rigorous demonstration that rational individuals, left free to engage in voluntary exchange, will construct competitive market institutions that yield optimal levels of individual freedom and material welfare. In the absence of market failures this economic theory of individual rationality indicates that intervention by public authorities or the forming of collective groups such as trade unions lower efficiency and thus the level of output and welfare.

This argument is based on market efficiency. It uses the fundamental theorem of welfare economics, which states that under certain conditions (such as perfect information, the absence of externalities, etc.), a perfectly competitive outcome is efficient in the sense of being Pareto optimal. In other words, the result of free markets under these conditions is a situation in which no one can be made better off without making other people worse off in terms of their utility, which typically depends on the amount of goods they consume. That is, there are no costless – in the sense of making someone worse off – ways of making anyone better off.

Economists, however, do not rest there. They also explore how what are called market failures can prevent market outcomes from being efficient. Market failures include such things as:

1. Monopolies and other departures from perfect competition. Monopoly producers may produce less than what is efficient for the economy because they want to create an artificial scarcity and keep the price of their product high in order to make high profits.

2. Externalities (in which people and firms affect others adversely or positively without either paying or being paid. Firms may emit too much pollution which makes other firms and people worse off because the latter, rather than they, bear the costs of pollution.

3. Public goods which no private firms will want to produce because they cannot make people pay for them. Public goods are those which can be enjoyed by all at the same time (like listening to radio programs off the air) and which the producer cannot prevent people who don’t pay from consuming it (for instance, national defense – a producer of this service cannot selectively protect some people from foreign invasion without protecting others who do not pay).

4. Imperfect information, in the sense that buyers and sellers do not possess all the relevant information to produce efficient outcomes. Imperfect information implies that at least some individuals in the economy do not have complete information that allows them to make appropriate decisions: for instance, if consumers do not have complete information about the properties of medicines, they may buy those which do not work, or not buy those which actually work but which they think do not (in the latter case both the consumers will be better off by using the medicines and the firms would make more profits if they did).

If market failures do occur, economists analyze how they can be made to operate more efficiently, for instance, with government breaking up monopolies, imposing fines for pollution, supplying public goods, and by certifying whether medicines work. Some economists tend to think these market failures are rare and that government as the solution would frequently make matters worse. Other economists tend to believe these market failures are fairly common and that, within limits, government can correct for these problems.

Moreover, markets may, and often do, result in outcomes that are thought inequitable. Markets may be efficient but the free market outcome does not prevent someone from getting all the goods and some people getting very little or even nothing. Thus, the market may be unable to provide people with things they need even for basic biological subsistence, while others may get more goods than they can ever use. The rapid increase in inequality in advanced industrial economies, including the United States, since 1980 has generated new research that questions the ability of free markets to produce fair results.[13]

Economists can respond to the issue of inequality with the Second Fundamental Welfare Theorem that states that for each and every possible beginning distribution of income and wealth, there is a different optimal social welfare outcome. Trying to correct for fairness by changing market prices, as for example through rent controls, will be counter-productive. The preferred way to deal with these justice issues is to redistribute resources (wealth) which will result in a new social welfare outcome. However, when doing so care must be taken that incentives are not adversely impacted. New research[14] shows that moderate redistribution, through increased progressive taxation on the rich, may actually increase a countries growth rate by increasing opportunities for the poor and middle classes.[15]

Furthermore, economic theory can provide a number of tools to help policy makers working toward the common good. Concepts of scarcity, choice, and incentives drawn from microeconomics are important as are concepts such as effective demand[16] drawn from macroeconomics.

For example, one important role economic theory can play in helping achieve the common good is a negative one. Economics is at its best when showing that a policy has unintended consequences that contradicts the desired results. Scarcity requires choices and choices result in opportunity costs, and choices are affected by incentives. For example, if the desired goal is to provide cheaper housing for the poor, rent controls that put a ceiling on price generate a disincentive for landlords to provide rental housing. Instead they will have an incentive to get around the price ceiling by cutting up the unit into multiple rentals, charging for key deposits, and reducing maintenance. Another example is the "no free lunch" one. A dollar spent on cancer research can't be spent on unemployment benefits. Economics challenges policy makers to explain why doing X is better than alternatives, Y and Z. There are many such examples.

Recent developments in microeconomic theory and game theory go further and demonstrate that in a world of interdependence and imperfect information, individual self-interest can result in socially irrational outcomes. As a result cooperative behavior is needed to complement self-interested behavior to yield efficient economic outcomes. If interdependencies are the rule, not the exception, market failures due to ubiquitous "externalities" make it impossible to attain the common good without some form of collective intervention.

There are two lines of argument I will pursue. The first focuses on how the existence of externalities requires market outcomes be over-ridden. The second is that recent scholarly work in economics recognizes the criticisms and flaws in free markets and that under conditions of interdependence and imperfect information, rational self-interest frequently will lead to socially irrational results unless that self-interest is constrained by government intervention; group self-regulation; or an embodied moral code.

Externalities and the Common Good

Using the concept of externalities economic theory can, in fact, provide a legitimate basis for public intervention into the market process. Specifically I argue that individual rationality can provide an economic basis for the type of public employment and social programs derived from the common good philosophy embodied in the Bishops' Pastoral Letter on the economy.[17]

Many privately produced goods generate third party effects, both positive (social benefits) and negative (social costs), which affect people who are not involved in the transaction. Pollution is a social cost inflicted on others by those who produce and those who use automobiles. Since the pollution cost is not borne by the producer or individual consumer, too much pollution is produced (and more automobiles than if their price included the cost of cleaning up the pollution caused by their manufacture). When one neighbor maintains his or her house, it raises the value of all the houses in the neighborhood. This is an example of a positive externality yielding a social benefit to all the neighbors. Since not all the benefits are captured by the one maintaining his or her house there is less incentive to do so and thus less "maintenance" is produced.

The existence of externalities results in market failure. That is, the market system under-produces private goods with social benefits and over-produces private goods with social costs. When, because of externalities, social costs and benefits diverge from private costs and benefits, what is best for each individual is not what is best for society. Government, having the power to compel payment or compliance, has been seen traditionally by economists as the institutional mechanism to correct these market failures.

Next I want to apply the concept of externalities to several situations that demonstrate how economic theory can be useful for a communitarian conception of the common good.

Free market economists such as the late Nobel Laureate Milton Friedman have long recognized that education is a special commodity that requires government intervention.[18] It has positive externalities since education has a greater value to society as a whole than to the individual alone. For example, an educated person, it is argued, makes a better voter and more generally is necessary to keep our modern, complex society operating.

However, many commodities besides education possess positive externalities. Health is certainly one example. Preventing or curing a worker's illness or accident not only benefits him or her but also those who suffer from his or her lost output. Also preventing communicable diseases and illnesses has benefits to all who are exposed. Thus, the subsidization of health care carries the same logic as the subsidization of education.

The argument can be extended. Many production processes generate negative externalities in the form of environmental pollution. Economic theory would suggest that the pollution should be taxed as a way to get producers to clean up the production process. Using incentives for people and companies to act in their self interest is more efficient than trying to regulate pollution via administrative control.

I have focused on the issue of externalities because it holds out the greatest hope for understanding between adherents of economic theory and advocates of the common good philosophy. As the pervasiveness of externalities, and thus interdependence, is recognized the practical policy conclusions derived from individualist economic theory converges to those obtained from a more communitarian conception of the common good. Of course there may be argument over the best way to subsidize commodities that generate positive externalities and to tax those that generate negative externalities.

Imperfect information, Strategic Behavior and the Need for an Embodied Moral Code

As noted above, traditional economic theory assumes independence of economic actors and perfect information. However, recent work in Behavioral Economics[19] demonstrates that the more realistic assumptions that one person's behavior affects another's and that each has less than perfect knowledge of the other's likely behavior, can give rise to strategic behavior.

A classic example is the situation where both the employer and worker suspect that the other one cannot be trusted to honor their explicit or implicit contract. For example, the employer thinks the worker will take too many coffee breaks, spend too much time talking with other workers, and generally work less than the employer thinks is owed. The worker, on the other hand, thinks the employer will try to speed up the pace of work, fire him or her unjustly if given the chance, and generally behave arbitrarily. When this is the case the worker may tend to shirk and the employer will increase supervision to stop the expected shirking. If the worker would self-supervise, production costs would be lower. Thus this distrust between employer and worker reduces efficiency.

In this case the pursuit of individual self-interest results in the worker and the employer as individuals and as a group becoming worse off than if they had been able to cooperate, i.e., not shirk and not supervise. The problem is simple and common. The employer and worker are interdependent and do not have perfect knowledge of what the other will do, and the resulting lack of trust leads to behavior that is self-defeating. This outcome is made worse if distrust is accompanied with feelings of injustice. For example, if the worker feels that the contract is unfair (low wages, poor grievance machinery, etc.), the tendency to shirk will be increased.

This case and others like it have two things in common. They have a group (workers and their employers) with a common interest in the outcome of a particular situation. And, second, while each attempts to choose the best available course of action, the result is not what any member of the group desires. For example, employers must pay for additional supervision costs and workers receive lower wages because of lowered productivity. In these cases the individual motives lead to undesired social and individual results.

Why is it so difficult for the individuals involved to cooperate and make an agreement? The reason is that exit is cheap, but voice is expensive.[20] Exit means to withdraw from a situation, person, or organization and depends on the availability of choice, competition, and well-functioning markets. It is usually inexpensive and easy to buy or not, sell or not, hire or fire, and quit or shirk on your own. Voice means to communicate explicitly your concern to another individual or organization. The cost to an individual in time and effort to persuade, argue, and negotiate will often exceed any prospective individual benefit.

In addition, the potential success of voice depends on the possibility of all members joining for collective action. But then there arises the free rider problem. If a person driven only by self-interest cannot be excluded from the benefits of collective action, he or she has no incentive to join the group agreement. Self-interest will tempt him or her to take the benefits without paying the costs; i.e., watching educational television without becoming a subscriber. This free riding explains why union organizing is next to impossible in states that prohibit union shops (where a majority of the workers voting for a union means all workers must join and pay dues).

Allan Schmid refers to these problems as social traps.[21] These are situations where there is some act under the individual's unilateral control that promises to produce a short run welfare improvement for that individual, but at the same time is not consistent with what individuals who share a common preference want to obtain as a long run result.

How can we spring these social traps generated by interdependence and imperfect information? The resolution of the problem is not easy, for they are persistent and frequently intractable. There are three possibilities: government intervention; group self-regulation; and institutional reinforcement of those moral values that constrain self-interested behavior.

Market failures such as pollution or monopoly have generally been seen as warrants for government intervention. However, there are ubiquitous market failures of the imperfect information variety in everyday economic life. In these cases private economic actors can also benefit from government measures for their protection, because interdependence and imperfect information generate distrust that can lead the parties to self-defeating behavior. Certain kinds of government regulation--from truth-in-advertising to food-and-drug laws--can reduce distrust and thus economic inefficiency, providing gains for all concerned. However, government regulation has its limits. Where the regulated have concentrated power (i.e., electric companies) the regulators may end up serving the industry more than the public. Well financed lobbies can sway legislators to pass laws that benefit special interests rather than the common good. In addition, there are clearly situations in which government operates to serve the self-interest of the members of its bureaucratic apparatus. Another major limitation on the ability of government to regulate is the willingness of people to accept enlarged government activity necessary to carry out the new policies. Government can serve the common good, but it has clear limits.

The second way to spring these social traps is self-regulation. Sellers could voluntarily discipline themselves not to exploit their superior information. This is the basis of professional ethics. Surgeons, for example, take on the obligation, as a condition for the exercise of their profession, to avoid performing unnecessary operations, placing the interest of the patient first. The danger is that their professional association will end up protecting its members at the expense of others.

This leads to the final possibility--developing institutions to heighten group consciousness and reinforce moral values that constrain self-interested behavior so that the pursuit of short-run rewards and free riding can be controlled. Is it possible to rebuild institutional mechanisms so that long-run interests and moral values become more important in directing economic behavior? Yes, but the view of people as simply self-interested maximizers needs to be re-thought .

Catholic social thought claims that all policies and institutions of society must honor the dignity of the human beings involved. Thus economic and ethical issues become intertwined in such a way that they cannot be separated. In Laborem Exercens[22], John Paul II argues that the workplace is key to human development and dignity of the worker is as important as productivity. In Caritas in Veritate, Benedict XVI goes further and makes the case that economic relations can and should be guided by a philosophy of gift. He says:

… in commercial relationships the principle of gratuitousness and the logic of gift as an expression of fraternity can and must find their place within normal economic activity. This is a human demand at the present time, but it is also demanded by economic logic. It is a demand both of charity and of truth.[23]

However, in the light of economists' claims about the importance of incentives for the operation of markets, is this treatment of work in Catholic social thought, and more particularly, the concept of gift in Caritas in Veritate, viable. An economist might argue that "humanization" of work may be impossible because of: a) the way markets create a bifurcation of people as consumers/workers, coupled with the competitive pressures that force business firms to become ever more efficient; and b) the consumerism which is rooted in human greed and the workings of the business system.

Because of competition one firm cannot improve working conditions, raise wages, or democratize the workplace if the result is an increase in production costs. Competition from other firms will keep the costs from being passed on in higher prices and, thus, profits will decline. The bifurcation of people into consumers/workers means that what they prefer as consumers-- lower prices-- makes what they prefer as workers-- better working conditions and wages-- less obtainable. Reliance on the market as the primary decision making mechanism bifurcates the decision into separate areas. What people want as workers will not be ratified by those same people as consumers. This creates constant pressure to reduce labor costs, undercutting attempts to improve the quality of work life. Thus, the only hope may be to change work organization in ways that are both humanizing and efficient.

Let me present as an example the story of a gift relation that is similar to the standard efficiency wage theory in economics.[24] Consider a business firm which employs workers and produces for the market. This relationship is not just a simple market relation. Unlike many markets in which the two parties enter into a transaction and that is the end of their relationship, the relationship here is very likely to be a relatively long-term one – sometimes for a month or a year, or more usually an indefinite period – and one in which the firm is not hiring a certain amount of labor services, but a certain number of explicit or implicit hours of labor. When the labor contract is made the employee knows his or her wage, but has not yet provided the labor services. The employer may not be able to monitor exactly how hard the employee works, especially in more complex jobs, even with supervisors, and the employee has a great deal of leeway about how much effort he or she will put into the job. The degree of effort, in turn, will depend on how the employee believes he or she is being treated by the firm. A symbol of this treatment is the wage paid, although other conditions of work also count. This can be likened to a gift exchange: if employees believe that they are being well treated and well paid, they will in return be loyal to the employer and buy into the employer’s goals. They will feel satisfied with their job and be proud of working for the employer, and therefore will put in a great deal of effort. If employers believe that this is the way their employees will respond, they will pay a fair wage and will try to provide a good working environment. Productivity will be higher than if they did not pay a fair wage and provide for good working conditions. Moreover, there are likely to be fewer labor–firm disputes, which will have a positive effect on efficiency. And there probably will be less need for supervisory personnel.

A few examples might be Costco and Google's labor policies. Costco has significantly better wages and benefits than its competitors with the result they have a substantially lower labor turnover rate. Google employee extras include free lunch, dinner and snacks, subsidized massages, on-site doctors, free laundry, free gym and more. Also as a way of motivating their employees, a number of companies have moved to worker shared ownership.

Worker Shared Ownership

There is a growing practice of sharing the fruits of ownership with a company's workers, as documented by research at the National Bureau of Economic Research, that holds out hope of realizing work that supports them physically and gives them a sense of esteem and of contributing to an important undertaking.^{^[25]} In the United States, 44 percent of employees have part of their pay linked to company performance, either through ownership, stock options, profit-sharing or gain-sharing.

There are several ways in which firms share the rewards (and risks) of business with workers in what is called shared capitalism: Profit-sharing rewards workers based on the profit of the company by paying workers cash through bonuses or by placing the workers’ share of profits in a retirement plan. Sometimes profit sharing is paid to workers in company stock, so what is received as a profit share becomes employee ownership. Gain sharing offers workers payments based on the performance of their work units rather than of the whole enterprise. Employee ownership offers employees ownership of part or all of a firm through shares of listed firms or through comparable legal arrangements of non-listed firms. Employee Stock Purchase Plans allow workers to buy stock with deductions from their paychecks with a discount from the market price. Finally, stock options are a hybrid between profit sharing and employee ownership. A stock option gives the worker the right to buy the stock at a set price anytime during a specified period following the option grants. The employee can get the upside gain of a rise in the share price without the downside risk of losing part of their investment.

The Bureau of Economic Research “Shared Capitalism” Project^{^[26]} is the major research on the extent to which workers’ earnings depend on the performance of their firm or work group in the US and Europe and on the impact of sharing arrangements on economic behavior. Their evidence shows that: 1) a large and growing proportion of workers are covered by shared capitalism through worker profit-sharing, bonuses, or worker ownership of shares; 2) outcomes for workers and firms are higher under shared capitalism than under other work and pay arrangements; and 3) that worker co-monitoring helps overcome the free rider problem that arises when part of pay depends on the productivity and effort of all workers.

In a report^{^[27]} published by the Center for American Progress in March 2011, the principal researchers from the National Bureau project point out a strange anomaly in current United States tax policy: Companies are allowed to write off costly stock options that represent incentive pay for top executives, despite little to no evidence that they work to improve company performance. Professor Nancy Folbre^{^[28]} has suggested a policy of restricting these tax benefits to companies that provide the same type of incentive pay for all full-time employees, stipulating that the value expended on the bottom 80 percent of employees by salary must equal at least that expended on the top 5 percent. She points out that similar restrictions have long been in effect for employee retirement and health plans. The costs of these health programs are not tax-deductible unless they are offered in a nondiscriminatory way to all workers.

If we want to reshape our individualist economy into a more communitarian form we need to support modest changes in tax incentives that could expand worker share of the economy.

Where do We Go from Here: Alternative Measures of the Economy

This paper has been occupied primarily with how economic theory might aid the attainment of the Catholic social thought concept of the common good with some attention to policy issues. The shared ownership movement discussed above is important and has the potential to aid worker dignity. I want to end by looking at another concrete proposal that has some possibility of being accepted in the real world of economic policy making and that also would be a step forward in closing the gap between our present individualist society and the common good.

The assumption that the economic order is the most important one and that progress is to be viewed primarily as economic progress is the assumption that renders economic theory so important. The emphasis on quantification in economics adds another element to its particular notion of the good. Measurements of the common good focus on means and ends that can be quantified. One practical outcome of this is a heavy emphasis on "things" over interpersonal relationships, education, cultural affairs, family, workplace organization, etc. Things are countable while the quality of these other spheres of human life is not. In the area of economic policy especially, such concerns are treated often as obstacles to be removed or overcome. A classic example is the construction of public housing for the poor. Square footage per household is the key variable instead of such intangibles as neighborhood, community, or access to services. Another example is welfare policy that concentrates on levels of support and ignores the psychological impact of means testing or the prohibition of able bodied males in the household.

If the economy was viewed instead as one among several important parts of society, that all contributed to human welfare, we would need to modify our national accounting system. The use of Gross Domestic Product as the measure of progress and per capita change as the measure of well-being is questioned by many and certainly is not a measure of the common good as seen in Catholic social thought.

A number of ways of modifying our national accounting system have been proposed, such as the Measure of Economic Welfare proposed over 40 years ago by economists William Nordhaus and James Tobin in1972.^{^[29]} These measures add components involving leisure, nonmarket work, especially women’s household work, and the services of government and consumer capital (such as government infrastructure and consumer durables), and subtracts things such as commuting costs, regrettable necessities such as military expenditures, and an estimate of dis-amenities due to urban overcrowding and pollution. Many recent efforts in this direction involve subtractions for environmental damage. While some of the issues addressed, such as household work and environmental damage are straightforward and noncontroversial their proper valuation raises all kinds of difficulties, which poses the question of whether one should aggregate all these into one indicator of wellbeing, or whether they should be tracked separately.

The widely-used Human Development Index in fact aggregates over only three elements – income, education, health – by giving equal weight to each in a way that many find more useful than focusing only on income.^{^[30]} Also, aggregation may not be necessary: we may focus on the achievement of a set of basic needs, as advocated by the basic needs approach that emerged in the 1970s, looking separately at education, health and nutrition.

There are a number of other attempts to construct alternatives to GDP but none of them are completely satisfactory since all still are focused on economic variables. Catholic social thought does not equate economic wellbeing with wellbeing in general. Except at very low levels of living there is very little correlation between economic wellbeing and personal happiness. Much of what is most important to real people, as opposed to "economic man", such as the quality of their relations to others, contentment, sense of meaning, etc. is missed by GDP and its alternative measures. However, the alternatives are clearly better than GDP at measuring well-being no matter how defined.

I will conclude this section with a proposal, at once both minor and large. The National Conference of Catholic Bishops and several Catholic universities-- Notre Dame, Boston College, Georgetown, et al-- should set up a research project to construct an alternative to GDP that more closely measures the various elements of the common good as envisaged in Catholic social thought.

V Conclusion

To conclude I will attempt to pull together the various pieces of this paper to indicate what I think are possible policies for a common good that promotes human flourishing; policies that follow from economic theory; policies attainable in the present political environment. This is an imperfect world populated by imperfect people so the least imperfect way to think about the common good is as a process not an end state. That is, what policies hold out hope of moving us in the right direction?

Doing so requires the cooperation of both the public and private sectors. The private sector produces goods and services efficiently but distributes them in ways often unfair. The public sector can deliver payments such as social security and Medicare quite efficiently but is less capable and more bureaucratic in producing goods or services. Thus greater taxation to reduce inequalities and the subsidization of education and medical care are important roles of the public sector in achieving the common good. A strengthening of anti-trust policies is needed to reduce the power of large corporations. But more is needed.

In a market economy most people earn a living by working and it is an important way that a person participates in society. Therefore any concept of the common good that includes the importance of human dignity has to include policies that provide work for everyone capable and willing to do so. This may require more than monetary and fiscal stimulus. Public works programs may be required. Allowing people to earn their living provides greater dignity than receiving handouts through welfare programs.

Present and future business managers need to be taught the possibilities of how greater worker participation and morale can lead to greater productivity. Here is a real challenge to business schools and M.B.A. programs in Catholic colleges and universities. It is clear that business managers cannot introduce policies that reduce profits if they are to remain competitive with firms that do not introduce such policies.

Finally, the common good transcends purely economic values and a public accounting system needs to recognize what is important and what is not. Thus the creation of a replacement for GDP is essential in developing and popularizing the idea of a common good and human flourishing.

These are policies that I believe will help move us along the road to the common good. The precise form they should take needs to be settled by the trial and error of what works. The balance between government and private sector action will need to be determined through the rough and tumble of the public policy process. It is here that Catholic social thought needs to make its voice heard.

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ENDNOTES