Economics: When the soldiers of destiny knelt before Fr Seán Healy in Inchydoney to receive absolution for their capitalist sins in 2004, something significant began.

In alliance with other religious institutions, Fianna Fáil and elements of the left, the Catholic Church is emerging as a serious critic of our economic system.

The alliance is a powerful one, already having significant influence on budgetary policy, but it is at least partly misguided. The end of a main Christian festival is a good time to examine why.

The feeling has grown that the Celtic Tiger is making us less spiritual. This is, of course, nonsense. Whereas it used to be easy to be spiritual - most people had little prospect of enjoying serious material pleasures - it now requires the exercise of free will.

Now there is merit in being spiritual, because temptation exists. The response of any religious institution should not be to criticise the existence of temptation, but to strengthen our defences against it.

Unfortunately the trend is going the other way. Far from targeting individuals, religious institutions are targeting policy makers.

Last November the Jesuits held a conference on the subject of "Values in Europe". But there wasn't a collar in sight. The economic contributions were dominated by concerns about the increasing materialism, inequality and disregard for workers' rights of our economic system.

The church's concern about capitalism is not new. In the Middle Ages the church opposed usury (the old word for lending money for interest). It later worried about several trends of the Enlightenment, which laid the foundations for capitalism. The belief that individuals should pursue gratification in this life, rather than waiting for it in the next, was one such worry.

Its concerns turned out to be partly justified. The industrial revolution - a child of the Enlightenment - tore up relationships between people, church and the land. More importantly, common values were weakened so that great material progress came at the cost of mass exploitation.

The ramifications of this exploitation ranged from political disruption, revolution and, indirectly, world war.

A consensus for a new social contract emerged from the ashes of the last world war. Capitalism needed to be moderated by equal access to opportunity and by some protection of the poor from destitution.

But, by the 1970s, state involvement in the economy had gone well beyond protecting the poor from destitution and ensuring equal opportunity. Equality was now the goal and the social welfare system developed to the point where even the able-bodied could avoid working and get the taxpayer to care for them and their families.

High state expenditure led to inflation, high taxes and high unemployment so that those who wanted to work couldn't. Worse still, soulless and dysfunctional housing estates, populated by the poorest in society, became traps of welfare dependency.

Taxpayers eventually became disillusioned with the cost of the social contract. In some countries, such as Britain, they withdrew their support for it, rejecting the view that state protection and job security were justified. The new dictum was that individuals would only abuse any generosity shown to them and only the market could force them to act responsibility.

Thus the breakdown in the contract began. Informal contracts are also breaking down on the shop floor as companies do away with pension schemes, downsize their staff and put increasing pressure on workers to deliver more.

In a book simply called Trust American Francis Fukuyama made an observation relevant to Irish Ferries. He pointed out how in Japan managers and workers are bound by a common ethic of mutual responsibility. In that country, managers will bear the brunt of downsizing first before expecting workers to do so.

Fukuyama shows why, whether it springs from Judaism, Christianity or Buddhism, religion underpins everyone's faith in the system.

And in a more recent book, The Irish Times's Joe Humphreys identifies why this is so. In his book, The Story of Virtue, he points to the principle of reciprocity or the golden rule, "do unto others as you would have them do unto you".

Its importance is as follows. If each person follows this rule there is likely to be less distrust and conflict in economic transactions and this will reduce costs of doing business.

But it is not enough for each person to believe it; they must have confidence that others believe it to. Otherwise their good behaviour will not be reciprocated.

Today's materialist culture is certainly a threat to church. A successful economy provides the opportunity to the individual to gratify a thousand desires now. The church wants us to go to church and get into heaven. We want to go to Brown Thomas and get into the property market.

But in the long run, materialism also threatens capitalism, corroding relations between economic actors.

For instance, the Rip-Off Republic phenomenon showed how trust in the public sector and in business has been undermined by growing evidence of a rip-off culture and public sector waste.

In the Irish Ferries case, the sound arguments of management for rationalisation and cost-cutting were completely undermined by the fact that managers did not apply it to their own salaries.

Contrast this with Willie Walsh's recent actions. Before asking workers in British Airways to take pay cuts, he started cost-cutting at management level. His respect for reciprocity and moral consistency has made his actions credible.

So religious institutions of all persuasions are right to challenge our economic policies and behaviour.

But just economic policies and behaviour can be sustained only if strong moral values underpin them. Religious institutions can best contribute to better policies and behaviour by improving the moral capital of voters and economic agents.

Focusing on criticising policies and behaviour is putting the cart before the horse.

Religion is indeed essential to economic life. A capitalist world without faith would be a barren and pointless existence. Neither would capitalism itself survive without a complementary value system.

Reciprocity, equal opportunity, protection of the physical environment and quality of life are just some of the values that capitalism must respect if it is to command a consensus in the future.

Without them, libertarian capitalism could become to this century what communism was to the 21st century.

But these values cannot come from within capitalism. They must come from outside. Neither can they be secular. A logical, secular, calculation of self-interest applies reciprocity to those in whom it is in our interest to do so. Only faith and belief in unrequited goodness of others - untainted by calculation - can lead us to rely on the reciprocal decency in the wide range of transactions we conduct on a daily basis.

Capitalism may be the engine of our daily lives, but values are the steering wheel. The ultimate role of religious institutions is to steer us through the moral economic choices we must make in the year and years ahead, not to interfere in the workings of the engine.

As far as economic policymaking is concerned, the churches should follow Christ's exhortation and render unto Caesar what is Caesar's.