Updated: 1/13/20
Christian Economics: Teacher's Edition
He is the image of the invisible God, the firstborn of all creation. For by him all things were created, in heaven and on earth, visible and invisible, whether thrones or dominions or rulers or authorities--all things were created through him and for him. And he is before all things, and in him all things hold together (Colossians 1:15--17).
The Apostle Paul made it clear that God the Son created the universe. This passage identifies Him as the God of creation in Genesis 1. This is definitive: And he is before all things, and in him all things hold together. This is the source of all coherence. This is the origin of all cause and effect. This is the Christian doctrine of God's providence. He not only created the universe, He sustains it, moment by moment.
This biblical doctrine rests on the biblical doctrine of God's creation of the universe out of nothing. The universe was not an emanation out of God's being. It was also not formed out of pre-existing stuff. As surely as the nothing preceded the Big Bang, nothing preceded God's creation of the universe. As surely as cosmologists cannot answer the question, "What preceded the Big Bang?" and therefore they dismiss it, so creationists dismiss the question "How can something come out of nothing?" It is a variation of the child's question: "Who created God?" It is this: "Who created the stuff that went 'bang'?" When we come to the question of cosmic origins, the evolutionary cosmologists and the Christians creationists cannot answer a question that children raise. Origins are scientifically and logically unexplainable.
The difference between the Darwinian evolutionists and the Christians is profound. It is the question of purpose. The Darwinist denies that there was any purpose in the universe directing evolution. The Christian creationist begins with the assumption of God's purpose as preceding the creation. There is no logical way to reconcile these worldviews. They are at war with each other. On this point, read Chapter 5: "Design vs. Darwinism."
There have always been multiple theories regarding the source of the coherence of the universe. By far the most important non-Christian theory in modern times is the doctrine of evolution through natural selection. It was made famous by Charles Darwin in his book, On the Origin of Species by Means of Natural Selection, or the Preservation of Favoured Races in the Struggle for Life, which was published in November 1859. He offered a theory of biological evolution that did not rely on any doctrine of God or cosmic purpose. He was not the first evolutionist, by any means. But he and his co-discoverer Alfred Russel Wallace in 1858 were the first to attribute biological evolution to natural selection: the purposeless process of the cosmos. They did this in a little-known academic journal. Their articles received no attention. A year later, Darwin's book did.
Darwin got this idea from a contemporary of Adam Smith, Adam Ferguson. Smith and Ferguson were friends. They were participants in what today is called the Scottish Enlightenment. Ferguson wrote a book, An Essay on the History of Civil Society (1767). In Section II, The History of Political Establishments, Ferguson wrote this: "Every step and every movement of the multitude, even in what are termed enlightened ages, are made with equal blindness to the future; and nations stumble upon establishments, which are indeed the result of human action, but not the execution of any human design." Therefore, no human being looked into the future to design institutions. Ferguson did not use the word "evolution," but this is the meaning of his sentence. It offered a theory of unplanned social evolution. Darwin took this idea of unplanned social evolution, and he applied it to biological evolution. This was the opinion of F. A. Hayek, the libertarian social theorist and Nobel Prize-winning economist. He offered this opinion in an essay published exactly two centuries after Ferguson's book: "The Results of Human Action but not of Human Design" (1967). He was not the first scholar to hold this view of Ferguson's social evolution as the original source of Darwin's theory of evolution through natural selection.
Smith adopted Ferguson's theory to explain economic order in his 1776 book, An Inquiry into the Nature and Causes of the Wealth of Nations. He spoke of an Invisible Hand as guiding economic processes. He had also invoked the Invisible Hand in his 1759 book, The Theory of Moral Sentiments. Smith was a Deist. He believed in God's providence. He wrote of the economic decisions of rich people:
They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition (Theory of Moral Sentiments, Bk. IV, Chap. 1, Para. 10).In stark contrast to his earlier invocation of a providential Invisible Hand, Smith never mentioned providence in Wealth of Nations. Here, the Invisible Hand was a mere metaphor.
As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention (Bk. IV, Chap. 2, Para. 9).
He has been followed in this by virtually all free market economists. They attribute the orderliness of the free market to autonomous forces within the free market.
This is the background to Leonard E. Read's essay, "I, Pencil." Read was not an atheist. He was a believer in evolution. He spoke of God with a capital G. He believed in a spiritual realm. But he did not invoke God's providence as the source of economic order.
I worked for Read from September 1971 to late 1972. I had many opportunities to speak with him. He told me this story. He said that he got many of his ideas for articles in his dreams. A woman appeared to him in these dreams and gave him suggestions. When he wrote down each suggestion the next day in his daily diary, he ended the summary with this: RSVP. This is the acronym for a French phrase, "répondez, s'il vous plait," meaning "please reply." He told me that this was his invitation to her to visit him in another dream. He was a mystic. He was no atheist. But it is not easy to determine from his writings what his idea of god was. It was closely associated with human creativity. But he attributed much of his own creativity to a spirit that appeared to him in his dreams.
Milton Friedman won the Nobel Prize in economics. In an introduction to a later reprinting of "I, Pencil," he wrote this:
Leonard Read's delightful story, "I, Pencil," has become a classic, and deservedly so. I know of no other piece of literature that so succinctly, persuasively, and effectively illustrates the meaning of both Adam Smith's invisible hand--the possibility of cooperation without coercion--and Friedrich Hayek's emphasis on the importance of dispersed knowledge and the role of the price system in communicating information that "will make the individuals do the desirable things without anyone having to tell them what to do."
Friedman was commenting on Read's discussion of market processes as unplanned. But Read also spoke of the market as a miracle. Friedman and other economists who appreciate Read's essay do not use such language to describe the market process--not even Israel Kirzner, who is an Orthodox Jewish rabbi and a follower of Ludwig von Mises.
In the following presentation, I contrast Read's description of the free market with my own. I am a providentialist. Read was not. I explain market order as the product of God's absolute sovereignty and human beings' full responsibility. The free market is not autonomous. Read did not think so, either. But "I, Pencil" is a defense of what appears to be an autonomous market, bounded only by a limited civil government to protect private property.
Point one of the biblical covenant is God's transcendence, but also His presence. How does this relate to Read's concept of miracle?
How should we conceive of the free market? As something miraculous or as something predictable? As something unexplainable or as something explainable? As something providential or as something autonomous?
1. Read
In his 1964 introduction, he spoke of "the miracle of the market." In the 1958 essay, he wrote this:
I, Pencil, simple though I appear to be, merit your wonder and awe, a claim I shall attempt to prove. In fact, if you can understand me--no, that's too much to ask of anyone--if you can become aware of the miraculousness that I symbolize, you can help save the freedom mankind is so unhappily losing. I have a profound lesson to teach. And I can teach this lesson better than can an automobile or an airplane or a mechanical dishwasher because--well, because I am seemingly so simple.
Read spoke of the pencil as representative of a process: the miraculousness that I symbolize. This is the basis of the power of the essay. But there is an inherent problem with this description of the market as a miracle. It reverses the meaning of the word miracle. A miracle is a rare, unexpected deviation from the expected. It interrupts familiar processes in our lives. This is why atheists do not use the word. It implies that someone with consciousness has intervened into the laws of nature or the laws of society. A miracle is a personal God's violation of a seemingly impersonal series of events. The atheist speaks of a random event or the appearance of something statistically odd. He may speak of something not yet explained. But he does not speak of a miracle. Read did.
The market is a continuous process, as Read described it. In this sense, there is nothing miraculous about the market. Its results are amazingly predictable. We go to a store and expect to find just the product we are looking for. We are surprised when the store is out of stock. "What's this? An empty row on a shelf!" Why are we surprised? Because this rarely happens.
This is why secular economists do not speak of the miracle of the market. They see the market as reliable, predictable, and routine. But Read saw it as a miracle.
2. North
I believe in miracles. I agree with the Roman Catholic layman and writer, G. K. Chesterton: "The believers in miracles accept them (rightly or wrongly) because they have evidence for them. The disbelievers in miracles deny them (rightly or wrongly) because they have a doctrine against them." Secular economists have a doctrine against miracles. Almost all economists are secular.
The market is a process governed by law. This is a law-order. It is coherent. It is part of a system of laws. This law-order is comprehensive: personal (God), providential (God), judicial (civil law), and self-reinforcing (feedback from endogenous, built-in market sanctions). There may be an occasional miracle, but this is supplemental to the market process. God's gracious miracles have impact in our lives because of the regularities in our lives, including the regularities of the market. In this sense, miracles have leverage. The regularities of our lives amplify the positive impact of miracles.
The free market is the result of societies that honor and enforce God's ethical laws, such as the laws protecting private property. These laws are covenantal. They govern the individual covenant, the family covenant, the church covenant, and the civil covenant. There are negative sanctions against thieves. These sanctions are institutional. They are also eschatological: the final judgment. So, they are individual. They are also institutional. How can they be both? Because they represent the Trinity, who is both one and many.
The market is not autonomous. Only God is autonomous. God makes His own laws. He also makes laws governing the cosmos. The world is under God's law-order.
Point two of the biblical covenant is man's authority under God's sovereignty. How does this relate to Read's concept of mystery?
We live in a predictable world. We have routines. These routines work. We survive. Yet we understand little of the world around us. How can we make sense of its mysteries? After all, they are mysteries. How can we accurately describe the effects of mysteries? How can we explain mysteries and their innumerable interactions with the world we do understand, or think we understand? How can we exercise dominion if we do not understand the world around us?
1. Read
The pencil speaks.
You may wonder why I should write a genealogy. Well, to begin with, my story is interesting. And, next, I am a mystery--more so than a tree or a sunset or even a flash of lightning. But, sadly, I am taken for granted by those who use me, as if I were a mere incident and without background. This supercilious attitude relegates me to the level of the commonplace. This is a species of the grievous error in which mankind cannot too long persist without peril. For, the wise G.K. Chesterton observed, "We are perishing for want of wonder, not for want of wonders."
Chesterton believed in the God of the Bible. He wrote a book on theology, Orthodoxy. He died in 1936. When he spoke of wonder, he meant the wonder of a God-created world. He believed in providence and miracles. He dismissed wonders as marginal. These are the wonders of modern inventions. He instead focused on wonder.
Read correctly saw that the free market is a wonder, but he did not believe in the providence of God. He did not think that the generally unknown and generally unrespected processes of the market order were designed by God and implemented by God when He laid down His laws. He did not think that the internal sanctions of the market order--profit and loss--were designed. He respected these processes. He was in awe of these processes. But he was not in awe of God.
The genius of Read's essay is that he went from the simple to the complex. A pencil seems simple, but it is the product of an enormously complex institutional arrangement: the free market. He wrote this: "Simple? Yet, not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn't it?" It does. But when you finish the essay, it doesn't. That is why it is a great essay.
A pencil would be a mystery if it were not the product of the free market. It would be more than a mystery. It would be a miracle. Yet it is commonplace. This is an amazing fact, but only if you do not understand the market process.
2. North
The Bible teaches that we must start with what is simple and work to the complex. That is why God told Adam to name the animals of the garden before he began to exercise dominion over the garden, let alone the world outside the garden. The Bible also teaches the idea that the created realm represents God. Paul wrote:
For the wrath of God is revealed from heaven against all ungodliness and unrighteousness of men, who by their unrighteousness suppress the truth. For what can be known about God is plain to them, because God has shown it to them. For his invisible attributes, namely, his eternal power and divine nature, have been clearly perceived, ever since the creation of the world, in the things that have been made. So they are without excuse (Romans 1:18--20).
This is why Read's strategy of beginning with a simple pencil was a stroke of genius. It honors the biblical principle of representation: point two of the biblical covenant.
The universe is a mystery to us. It is not a mystery to God. God is omniscient. He understands everything exhaustively. Nothing surprises God. So, people do not need to understand the world exhaustively in order to understand it accurately. There are degrees of understanding among mankind. There are appropriate levels of understanding, person by person. Most of all, there is an intellectual division of labor. The free market lets us buy access to highly decentralized but accurate knowledge. It also provides economic incentives for people to sell their information.
The fact that market participants understand almost nothing about its operations is not an argument for central planning by government bureaucrats. The fact that the market is a mystery to men is not an argument against it. Nevertheless, it has proven difficult for defenders of the free market's legitimacy to persuade the common man, the common politician, and the common Keynesian economist of this fact. They all want order. They are afraid to trust in mystery to provide this order. Instead, they trust state bureaucrats and central bankers to provide top-down economic interventions to provide missing elements of order. This is how they understand order.
The Bible teaches clearly that there is a top-down economic order. All order is top-down. God is sovereign. He is transcendent. He is on top. He is the Creator. He is the Sustainer. He is the final Judge. But these are not arguments for socialism. The Bible teaches covenant theology. There is a cosmic hierarchy. Man is second in command under God. He has access to reliable general laws. These laws are revealed in the Bible. When individuals are self-governed by these Bible-revealed laws, they generally prosper. (Job was an exception temporarily.) The same is true of families, churches, and civil governments. The same is true of businesses, which are contractual, not covenantal.
In a covenantally faithful social order, order is bottom-up as well as top-down. Society is governed by three hierarchical systems of courts: family, church, and state. Most authority is initiated locally in each legal system. Difficult cases are appealed up two of these court systems: church and state. (Baptists and independents say that only one government has an appeals court: civil.) The Bible teaches this in Exodus 18: Jethro's advice to Moses about creating a bottom-up civil court system. So, the fact that there are mysteries does not mean that we should not trust the Bible's mandated bottom-up multiple court systems. We have access to biblical law. This is what God teaches. "The secret things belong to the Lord our God, but the things that are revealed belong to us and to our children forever, that we may do all the words of this law" (Deuteronomy 29:29). What could be more clear?
Biblical law sets up an economic system based on private property. The laws of the market process are therefore reliable and trustworthy. Mystery is not a threat to covenant keepers. God protects covenant keepers from the effects of destructive mysteries. "And we know that for those who love God all things work together for good, for those who are called according to his purpose" (Romans 8:28). Covenant breakers are not called according to His purpose. They are in rebellion against God. So, they are tempted by the lure of the idea of a sovereign civil government that replaces God at the top of the social order. This is the lure of socialism. The Bible mandates a rival economic order, one based on self-government under God's Bible-revealed laws.
Point three of the biblical covenant is ethics. This is related to law. How does this relate to Read's concept of the unseen regularities of the free market?
Central to the free market are markets for information. This is the main theme of Read's essay. How is it, he asks, that a pencil comes into existence despite the fact that no one knows how to make one? The answer is the market for highly specialized information. Knowledge is widespread. Highly specialized knowledge is possessed by billions of people. How can people who do not possess this knowledge get access to it? The answer is this: the free market.
1. Read
He wrote about this in this section: "No One Knows."
Actually, millions of human beings have had a hand in my creation, no one of whom even knows more than a very few of the others. Now, you may say that I go too far in relating the picker of a coffee berry in far-off Brazil and food growers elsewhere to my creation; that this is an extreme position. I shall stand by my claim. There isn't a single person in all these millions, including the president of the pencil company, who contributes more than a tiny, infinitesimal bit of know-how. From the standpoint of know-how the only difference between the miner of graphite in Ceylon and the logger in Oregon is in the type of know-how. Neither the miner nor the logger can be dispensed with, any more than can the chemist at the factory or the worker in the oil field--paraffin being a byproduct of petroleum.These people are not in direct contact with each other. How can they gain access to the specialized knowledge that they all need? Through the free market.
Here is an astounding fact: neither the worker in the oil field nor the chemist nor the digger of graphite or clay nor any who mans or makes the ships or trains or trucks nor the one who runs the machine that does the knurling on my bit of metal nor the president of the company performs his singular task because he wants me. Each one wants me less, perhaps, than does a child in the first grade. Indeed, there are some among this vast multitude who never saw a pencil nor would they know how to use one. Their motivation is other than me. Perhaps it is something like this: each of these millions sees that he can thus exchange his tiny know-how for the goods and services he needs or wants. I may or may not be among these items.
This is an astounding fact to those who have never thought about this. Read does not describe how each person gains access to the knowledge he needs. The main source is the price system, which Read does not discuss here. People can buy information or products with money. They use prices to guide them.
The free market economist F. A. Hayek wrote about this in a 1945 article, "The Use of Knowledge in Society." But Read's discussion drove home the point far more graphically.
Read invoked the Invisible Hand. He capitalized it.
There is a fact still more astounding: the absence of a mastermind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work. This is the mystery to which I earlier referred.
Adam Smith did the same, twice: in 1759 and 1776. In Wealth of Nations, he did not explain what this Invisible Hand is or how it works. Neither did Read. Both of them expected their readers to exercise faith in the market process--faith in mankind--not faith in a providential God.
The above is what I meant when writing, "If you can become aware of the miraculousness that I symbolize, you can help save the freedom mankind is so unhappily losing." For, if one is aware that these know-hows will naturally, yes, automatically, arrange themselves into creative and productive patterns in response to human necessity and demand--that is, in the absence of governmental or any other coercive masterminding--then one will possess an absolutely essential ingredient for freedom: a faith in free people. Freedom is impossible without this faith.
This is a religious statement of faith. But secular economists do not see this as a religion. They see this as strictly logical. They reject Smith's deism and Read's mysticism. They are naive.
2. North
Each person possesses unique knowledge. This knowledge is dispersed in society. The key question is this: Can we trust the free market process of price setting to provide us with the knowledge we need? Next question: Does this knowledge benefit society? It benefits individuals, or else they would not sell their ideas for money. But what about in the aggregate? Humanistic free market economics cannot legitimately say, even though they do say. Free market economics rests on the assumption that individuals can judge best what they want and how much to pay. But there is no logical way to jump from the individual to society, given the theoretical foundation of free market economics: methodological individualism. This limitation does not hamper Christian economics. Christian economists have a theoretical foundation justifying their God-given ability to draw conclusions regarding collectives: God's law. This law is part of a coherent law-order for all of society, not just for economics. Knowledge is both individual and collective, just as the Trinity is. God knows everything. He holds this knowledge as part of a covenantally integrated order. This is a created order. It is personal.
Point four of the biblical covenant is sanctions. How does this relate to Read's theory of creativity?
The central figure in a free market economy is the entrepreneur. He discovers ways to serve customers. He is the source of creativity. He is guided by the lure of profit. Profit is the positive sanction derived from the decisions of customers to buy. Profit-and-loss accounting guides the market process.
1. Read
The pencil speaks.
I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles that manifest themselves in nature an even-more-extraordinary miracle has been added: the configuration of creative human energies--millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human masterminding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.
This happens naturally and spontaneously, he said. Adam Smith said the same thing. But is this accurate? Men naturally fight against each other. They naturally kill each other. They naturally steal. They organize to get the state to steal on their behalf. These are negative sanctions. Isn't this also natural?
The lesson I have to teach is this: Leave all creative energies uninhibited. Merely organize society to act in harmony with this lesson. Let society's legal apparatus remove all obstacles the best it can. Permit these creative know-hows freely to flow. Have faith that free men and women will respond to the Invisible Hand. This faith will be confirmed. I, Pencil, seemingly simple though I am, offer the miracle of my creation as testimony that this is a practical faith, as practical as the sun, the rain, a cedar tree, the good earth.
This takes faith to believe. Most people have trouble understanding the theology of this faith. Read did not make clear the foundations and details of this theology.
2. North
God is originally creative. Man is subordinately creative. This creativity is inherent in people. It is the dominion covenant in action. It defines mankind. This faith has been taught by Christians and Jews. It rests on the testimony of Genesis 1: 26--28. The case for freedom in the case for personal responsibility before God. Responsibility means to be under God's sanctions. God holds all people responsible to exercise dominion. He has allocated property to specific people and institutions in specific time periods. To exercise this God-given assignment faithfully, each person needs liberty.
To whom is man responsible? To God. But secular economists deny this. They leave God out of their theories. Covenant-breaking men then search for this missing god. Most of them in my day conclude that the state is God. It is the highest court of appeal. They conclude that people are responsible to the state and its designated agents. They fear negative state sanctions. The only other plausible source of sovereignty is the unregulated free market. This is pure anarchism. Almost no one has ever held this position.
Creativity involves finding solutions to existing problems. This discovery process is not understood. Even people who come up with solutions do not know how they do it. Entrepreneurs somehow imagine what they think are below-market costs for future solutions. It takes great faith to trust a supposedly impersonal universe, a supposedly impersonal free market, and autonomous entrepreneurs to keep coming up with workable, cost-effective solutions to billions of problems. This is not a commonly held faith.
In contrast, Christianity teaches that God is aware of all of these problems and their solutions. Men are not. But men do not live in a random universe. They live in a universe in which God is totally sovereign. God can and does help people find cost-effective solutions. It does not require an enormous leap of faith for Christians to accept the premises of continuing creativity in human affairs. When Christians learn how biblical law was designed by God to promote creativity through private property, they can accept what Read called a miracle: a coherent market order that enables people to achieve their personal goals by becoming creative in a system favoring voluntary exchange.
Point five of the biblical covenant is inheritance. It has to do with the extension of the kingdom of God in history. How does this relate to Read's discussion of capital?
Capital is the combination of raw materials--land and labor--over time. The time factor is crucial. Capitalism is well-named. It is a system of private ownership that encourages capital formation, which in turn favors economic growth.
1. Read
Read visited a pencil factory in preparation to write his article. It amazed him.
Once in the pencil factory--$4,000,000 in machinery and building, all capital accumulated by thrifty and saving parents of mine--each slat is given eight grooves by a complex machine, after which another machine lays leads in every other slat, applies glue, and places another slat atop--a lead sandwich, so to speak. Seven brothers and I are mechanically carved from this "wood-clinched" sandwich.
Without thrifty investors, there would have been no factory and no low-cost pencils. But Read did not say anything more about thrift. He did describe the tools of production.
My "lead" itself--it contains no lead at all--is complex. The graphite is mined in Ceylon. Consider these miners and those who make their many tools and the makers of the paper sacks in which the graphite is shipped and those who make the string that ties the sacks and those who put them aboard ships and those who make the ships. Even the lighthouse keepers along the way assisted in my birth--and the harbor pilots.
Read described the structure of production. He also described the structure of delivery, i.e., distribution.
Delivery? Why, in this area where men have been left free to try, they deliver the human voice around the world in less than one second; they deliver an event visually and in motion to any person's home when it is happening; they deliver 150 passengers from Seattle to Baltimore in less than four hours; they deliver gas from Texas to one's range or furnace in New York at unbelievably low rates and without subsidy; they deliver each four pounds of oil from the Persian Gulf to our Eastern Seaboard--halfway around the world--for less money than the government charges for delivering a one-ounce letter across the street!
It takes capital to accomplish this. Read did not discuss the stock market, the bond market, or the banking system that allow entrepreneurs to raise capital. That was not the focus of his essay. He wanted to convey two things: the complexity of the task of manufacturing and then delivering a pencil to a buyer, and the fact that no one knows how to do this. Only through market coordination can this be done.
2. North
Point five of the biblical covenant is inheritance. Each generation is supposed to leave more behind to heirs than it inherited. "A good man leaves an inheritance to his children's children, but the sinner's wealth is laid up for the righteous" (Proverbs 13:22). This mandates economic growth: compounding. It therefore mandates capital accumulation. Christians who believe this are future-oriented. They are willing to save at interest rates lower than present-oriented people. This helps transfer wealth to them over time.
And the Lord will make you abound in prosperity, in the fruit of your womb and in the fruit of your livestock and in the fruit of your ground, within the land that the Lord swore to your fathers to give you. The Lord will open to you his good treasury, the heavens, to give the rain to your land in its season and to bless all the work of your hands. And you shall lend to many nations, but you shall not borrow (Deuteronomy 28:11--12).
Read's article is about creativity. Read defends liberty in the name of creativity. I defend it in the name of responsibility: before God, before conscience, and before other people. The biblical goal is to build the kingdom of God in history (Matthew 6:33). This takes capital. It takes time. It takes people who are willing to accept added responsibility.
Ownership fosters both creativity and responsibility. God is the original owner. He is creative. His creativity is the model. He is also responsible: to Himself. "If we are faithless, he remains faithful--for he cannot deny himself" (II Timothy 2:13).
1. Ownership and Creativity
A person looks around and sees how a few things work. He concentrates on one extremely narrow sector of the market. He sees the economic results of the status quo: legal, economic, and cultural. He sees that some people write things down on paper. Even in the age of computers, they still use pencils. Until the advent of word processing in the late 1970s, pencils possessed a unique advantage for writers: erasers. Apart from the expensive IBM Selectric III, typewriters did not. Pens did not. School children learned how write using pencils. They still do.
There is a popular American phrase: "Build a better mousetrap, and people will beat a path to your door." Two things pose a challenge to this assertion. First, there has been no commercially successful improvement in the design of mousetraps since 1897. Over 4,400 American patents for mousetraps have been issued since 1838. Only one is remembered: the 1897 little nipper. Second, I quote Mac Ross, a great marketer. "If you build a better mousetrap, but you fail to allocate money for marketing, you will die alone and broke with a garage full of mousetraps."
The same is true of pencils. Read's "I, Pencil" article works well because just about everyone recognizes a pencil. Pencils are universal. This is another way of saying that a pencil is a traditional product. It is as difficult to break into the market for pencils as it is to break into the market for mousetraps. What unique selling proposition could anyone come up with for a new pencil? Pencils are pretty much the same. Brand loyalty may not be strong, but it is stronger than switching to a brand-new brand of pencils. How could a new company break into this stable market? Most people would avoid entering this market as a producer.
But maybe there is an unseen opportunity here. This is why successful entrepreneurship makes a few people rich. Competitors do not see the opportunity. It may be an opportunity to lose money, but it may also be an opportunity to make money. It begins with an idea: "I can do this better." "Better" may mean cheaper. It may mean technologically advanced. It may mean more exciting. Above all, it means more profitably.
Economics teaches the law of scarcity: "At zero price, there is greater demand than supply." This is the definition of a scarce resource: greater demand than supply. But sometimes a valuable idea is a free resource. This is because no one wants to pay for it. If no one ever pays to put a new idea into production, it will have no effect on the market. It will remain only as a dream or an obsession in the mind of the discoverer.
The person who comes up with his innovation may choose to patent it. This may not work as a strategy for making profits. Patent infringement is widespread. Some infringers have expensive lawyers on retainer. Profitable patents must be defended in courts.
The person may have to raise funds. He can borrow money. He will retain ownership of the idea, but he will owe money. Or he can sell partial ownership of the idea, but he will be less rich if the idea turns into a winner in the market. He can also try to sell the idea to a manufacturer or venture capitalist. Or he can fund production out of his own resources. This is all about ownership. Who owns what? On what terms? For how long?
2. Ownership and Responsibility
The great motivation for innovation has to do with ownership. Necessity is not the mother of most inventions. Other goals have proven far more effective in bringing new products to market. Who will have his name on it? Who will get rich? Who will negotiate the terms of sale to a huge conglomerate? Who will leave a legacy? In short, there are goals associated with inventions. These goals are part of an inventor's purposes.
When you have an idea, you get to dream big. You get to set personal goals that are associated with your big idea. Some innovators are willing to risk a great deal to achieve goals they have selected as their primary goals in life. I say "risk," but I mean "bear uncertainty." They are willing to sacrifice time, money, relationships, and other goals in order to attain specific goals that are high on their list of priorities.
A goal always has a cost associated with its fulfilment. Jesus warned:
For which of you, desiring to build a tower, does not first sit down and count the cost, whether he has enough to complete it? Otherwise, when he has laid a foundation and is not able to finish, all who see it begin to mock him, saying, 'This man began to build and was not able to finish' (Luke 14:28--30).
The owner bears the cost. He has an opportunity for gain, but he necessarily also has an opportunity for sustaining a loss. These are economic sanctions, not legal sanctions. Ownership is primarily a legal category, not primarily an economic category. It identifies the person who must bear negative sanctions for breaking the civil law. The economist is normally concerned with economic sanctions imposed by the free market rather than legal sanctions imposed by the state.
In terms of motivation, the owner has greater incentive to pay attention to details than anyone else. He will reap profits or suffer losses. This means that the owner is the most likely decision-maker to pay in order to gain knowledge that is associated with the production and distribution of a particular product or service.
Read's essay raises that crucial question: "What is to be done?" That is why it is a good essay.
How are we supposed to further the free market social order? If we need more liberty, how can we get it? Through politics. Through legal education. Through formal education generally.
1. Read
He ended the essay with a call to action.
The lesson I have to teach is this: Leave all creative energies uninhibited. Merely organize society to act in harmony with this lesson. Let society's legal apparatus remove all obstacles the best it can. Permit these creative know-hows freely to flow. Have faith that free men and women will respond to the Invisible Hand. This faith will be confirmed. I, Pencil, seemingly simple though I am, offer the miracle of my creation as testimony that this is a practical faith, as practical as the sun, the rain, a cedar tree, the good earth.
This sounds good, but how can it be achieved? He offered one vague sentence: Let society's legal apparatus remove all obstacles the best it can. Who should design this legal order? Who is trustworthy? How should it be done? Read showed how no one designed the free market. How can he logically call on readers to design the legal system that enables the market to operate? He implies that these creative know-hows are not always permitted by the state to do their work. How can his readers change politics in order to make creativity legal? He did not say. He never said in 50 years of writing. He did not trust political action. But political action is what changes a law from "not permitted" to "permitted."
2. North
There are four oath-bound covenants that people publicly affirm: individual, family, church, and state. They all are marked by law: point three of the biblical covenant. All four must be reformed if we are to benefit from the market order, as described in "I, Pencil." But in that essay, we are not told what to do or how to do it. There is no discussion of reform.
It has to start with the adoption of a replacement blueprint for society. Read did not offer such a blueprint in this essay or in any other. He dismissed social blueprints. But blueprints are inescapable concepts. It is never a case of blueprints vs. no blueprints. It is always a question of which blueprint.
The free market is just as effective in producing wealth as Read indicated. People do not understand how it works. Read did not discuss the basics of how it works: pricing, interest rates, capital markets, money, labor markets, and so forth. That was not necessary. He showed how the division of intellectual labor makes possible mass production of goods that could hardly be produced one at a time. He showed how the coordination of millions of people's efforts is accomplished without central panning. Even his one example of government planning is today almost dead: the government-run mail service. Email and overnight delivery have eliminated the mails except for government subsidized advertising: "junk mail." Catalogues arrive in our mail boxes. Not much else does.
The problem with Read's essay is that it is not grounded in cause and effect beyond the market itself. The absence of grounding makes the free market order vulnerable to intervention by the state: political coercion. Read invoked mystery and miracle. But most people want to believe that something other than individual decisions holds together the social order. They want to believe in design. They are not Darwinian evolutionists. When they get into big trouble, they pray. Or maybe they appeal to the civil government for aid. They do not trust their own efforts or the efforts of their neighbors. There is no providence in Read's system. People want to believe in God's providence. Free market economists reject the concept out of hand. They want the market's invisible hand to guide things. Read wrote this:
There is a fact still more astounding: the absence of a mastermind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work. This is the mystery to which I earlier referred.
But there is no Invisible Hand. It is a just a metaphor. Few people will trust their lives to a metaphor, nor should they.
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