In "Charity in Truth," Benedict denounced the profit-at-all-cost mentality of the globalized economy and lamented that greed had brought about the worst economic downturn since the Great Depression.
"Profit is useful if it serves as a means toward an end," he wrote. "Once profit becomes the exclusive goal, if it is produced by improper means and without the common good as its ultimate end, it risks destroying wealth and creating poverty."
The document, in the works for two years and repeatedly delayed to incorporate the fallout from the crisis, was released one day before leaders of the Group of Eight industrialized nations meet to coordinate efforts to deal with the global meltdown.
The release was clearly designed to give world leaders a strong moral imperative to correct errors of the past, "which wreaked such havoc on the real economy," and make a more socially just and responsible world financial order.
"The economy needs ethics in order to function correctly - not any ethics, but an ethics which is people-centered," he wrote.
The German-born Benedict, 82, has spoken out frequently about the impact of the crisis on the poor, particularly in Africa which he visited earlier this year. But the 144-page encyclical, one of the most authoritative documents a pope can issue, marked a new level of church teaching by linking the Vatican's long-standing doctrine on caring for the poor with current events.
While acknowledging that the globalized economy has "lifted billions of people out of misery," Benedict accused the unbridled growth of recent years of causing unprecedented problems as well, citing mass migration flows, environmental degradation and a complete loss of trust in the world market.
He urged wealthier countries to increase development aid to poor countries to help eliminate world hunger, saying peace and security depended on it. He specified that aid should go to agricultural development to improve infrastructure, irrigation systems, transport and sharing of agricultural technology.
At the same time, he demanded that industrialized nations reduce their energy consumption, both to better care for the environment and to let the poorer have access to energy resources.
"One of the greatest challenges facing the economy is to achieve the most efficient use - not abuse - of natural resources, based on a realization that the notion of 'efficiency' is not value-free," he wrote.
He denounced that the drive to outsource work to the cheapest bidder had endangered the rights of workers, and demanded that workers be allowed to organize in unions to protect their rights and guarantee steady, decent employment.
Benedict called for a whole new financial order - "a profoundly new way of understanding business enterprise" - that respects the dignity of workers and looks out for the common good by prioritizing ethics and social responsibility over dividend returns.
"Above all, the intention to do good must not be considered incompatible with the effective capacity to produce goods," he wrote. "Financiers must rediscover the genuinely ethical foundation of their activity so as to not abuse the sophisticated instruments which can serve to betray the interests of savers."
Kirk Hanson, a business ethics professor at Santa Clara University, said the encyclical is likely to spark debate over capitalism and social justice.
"When a group of U.S. Catholic bishops issued a similar statement during the Reagan years, it sparked a nationwide debate about the fairness of our capitalist system," said Hanson, who chaired the hearings leading up to the bishops' statement.
Benedict stressed he wasn't opposed to a globalized economy, saying that if done correctly it has an unprecedented potential to redistribute wealth around the globe. But he warned that if badly directed and if the problems aren't fixed, globalization can increase poverty and inequality and trigger the type of crisis under way.
Benedict has written two previous encyclicals in his four years as pope: "God is Love" in 2006 and "Saved by Hope" in 2007.
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By Associated Press Writer Nicole Winfield