Updated: 1/13/20
Christian Economics: Teacher's Edition
And to Adam he said, Because you have listened to the voice of your wife and have eaten of the tree of which I commanded you, 'You shall not eat of it,' cursed is the ground because of you; in pain you shall eat of it all the days of your life; thorns and thistles it shall bring forth for you; and you shall eat the plants of the field. By the sweat of your face you shall eat bread, till you return to the ground, for out of it you were taken; for you are dust, and to dust you shall return (Genesis 3:17--19).
Because this passage reveals God’s negative sanctions, it is associated with point four: sanctions. But there is a problem with categorizing it solely as an aspect of point four: its effects. Its primary effect is the economic pressure it places on humanity to cooperate. Through the market’s process of voluntary exchange, people gain access to others’ productivity at some price. Cooperation is an aspect of ethics: reduced violence and increased productivity. Cooperation furthers the dominion covenant (Genesis 1:26–28). So does market pricing. The auction’s primary principle of resource allocation is this: high bid wins. This is also the institutional foundation of the market process. The curse of the ground has increased the economic pressure on people to cooperate. The division of labor leads to increased productivity per capita and therefore increased wealth per capita. These are positive sanctions. We are back to point four.
There was scarcity before the fall. Adam initially was alone. He needed a helper. God gave him Eve, but only after he had named the animals of the garden. This in turn points to another aspect of scarcity: insufficient knowledge. Adam was not God. He was not omniscient. He needed theoretical knowledge. He also needed experience in applying theoretical knowledge to the creation: judgment (point four of the covenant). This was required for him to exercise dominion.
God cursed both Adam and the ground. These were twin aspects of the death sentence that God had promised before the fall. God continued to provide Adam with physical life, but Adam became a dead man. We might say that he was a dead man walking. But this misses the point. He was a dead man working. Adam's sin did not relieve him of the overall responsibility of exercising dominion. It just limited his time to do so. The curse of the ground also limited his efficiency.
The curses on Adam and the ground reduced his productivity. The creation now places obstacles in man's path: thorns and thistles. Every man must overcome these hindrances in order to increase his wealth. Wealth must now be pried out of the ground. This means increased costs: reduced efficiency. This loss of efficiency decreased Adam's output. This reduced output limited his wealth. This is a curse. But with all curses in history, there is grace attached. The grace in this case is the requirement that, in order to reduce the threat of violent conflict, there is now an economic incentive to cooperate with others.
When our productivity falls, our income falls. We then seek ways to regain this lost income. One way is to specialize in production. This was also true before the fall. Man is not omniscient. He needs specialized knowledge that others possess. This was Adam's sin: he relied on the rebellious knowledge that his wife provided. She in turn relied on the serpent's knowledge. Their dependence on false knowledge produced a false assessment of the forbidden tree. They both exercised bad judgment: bad as in faulty, and bad as in immoral. For that matter, so did the serpent. It also came under negative sanctions.
When we seek other people's knowledge, we must be prepared to pay for it. An offer of payment increases the likelihood of greater cooperation from others. But as we cooperate, we increase our dependence on others. This increased dependence is profitable. This in turn increases the cost of fraud or violence. Here is a fundamental economic law: "When the cost of anything rises, less is demanded." As the cost of fraud rises, less is demanded. There is more honesty than before. "Honesty is the best policy," said Benjamin Franklin in the late eighteenth century. Why is it the best policy? Because it increases cooperation, which increases output, which increases people's income. The same is true of reduced violence. It leads to greater output through greater cooperation. People also can safely devote less capital to protecting themselves against violence. Their net income rises as a direct result of this saving.
There were economic incentives to cooperate before man's fall. Cooperation produces greater wealth. God increased the economic incentive to cooperate when He cursed Adam and the ground. Each curse was a blessing in disguise.
We call a person with money to spend a buyer. As a buyer, he must deal with the economic effects of the curse of the ground. There is less wealth than there would be, had there been no curse. He wants more income. To achieve this, he must specialize as a producer. But in his role as a consumer and as a possible investor, he wants lower prices, increased quality, and more choices. How can he attain these goals? By finding sellers who offer these advantages.
The buyer shops for better deals. It is in his self-interest to have sellers compete with each other in order to get their hands on his money. He wants to hear these words: "Have I got a deal for you!" Also these words: "I will sell it to you cheaper." The more sellers who compete for his money, the wider his range of choices. This is the best definition of economic growth: "more choices per capita with the same expenditure as before. The buyer's money goes further." Walmart's slogan is this: "Save money. Live better." In four words, Walmart has identified the unique selling proposition of free market capitalism.
The buyer wants greater cooperation from sellers. The free market provides this through open entry and competition among sellers. Sellers compete against each other to sell to buyers for money, the most marketable commodity. So, the free market system is competitive. But this is competition within specific groups: sellers vs. sellers, buyers vs. buyers. This competition is part of a wider economy that operates in terms of cooperation. The greater the competition within the two groups, the greater the cooperation between them. Why? Because the cost of making purchases falls when prices fall. Remember this rule? "When costs rise, less is demanded." This is the other side of this rule: "When costs fall, more is demanded." When the cost of making purchases falls, there will be more purchases. This is another way of saying that there will be greater cooperation.
The buyer wants lots of choices. But the economist always adds this: "at some price." Any increase in the range of choices imposes higher search costs on buyers. At some point, the buyer is overloaded. He has too many choices for the time he has to do the searching. The inescapable trade-off between time and money increases the value of our time when the prices of things fall. This leads to demand for better information. In my day, the fastest growing large companies in the world are Google (Alphabet) and Amazon. Both of them provide information. Amazon offers evaluations by purchasers of products. There is a five-star rating system. While every product has a standard sales brochure on an Amazon sales page, most buyers skip this and go straight to the ratings. They recognize their need for accurate information. They prefer information that is provided by buyers/users to information provided by sellers. Amazon's enormous increase in market share indicates an enormous increase of cooperation between buyers and sellers. Amazon provides an international marketplace of cooperation. As the price of cooperation falls, more is demanded.
Specialization increases dependence between the seller and the buyer. This is a crucial aspect of specialization. The seller sells a product that buyers think is exactly the right product to solve their specific problem. He gains customer loyalty. At the same time, the buyers become dependent on the seller. This creates an opportunity for the seller to raise his price. But if he increases his price, this sends a message to existing buyers and potential new buyers: "There may be a better deal out there." They go shopping. Higher sales prices also send a message to rival sellers: "I can siphon off some of his client base if I can get the information to them that my product is as good or better, and it is also cheaper." So, the buyer's dependence is high "at some price." He is loyal to some product or company "at some price."
Prices matter.
In order to increase his output, the seller must specialize in production. He must become an expert in a narrow slice of the market. He will gain his competitive advantage by knowing more about this market than his competitors do. His rate of return on invested capital, raw materials, and labor will be higher in this narrow market than he could gain in another market.
The seller is involved in a quest for more money. Why money? Because it is the most marketable commodity. It offers the widest range of choices. So, to obtain ownership of the commodity with the widest range of choices, the producer concentrates his attention on a commodity with a narrow range of buyers. This is the nature of specialization.
In direct-response marketing, the seller learns that the easiest, least expensive way to make a sale is to push the buyer's hot button. But there is a cost of this approach: a narrow market. As we copywriters say, "the narrower the market, the hotter the buttons." When a copywriter asks a prospective client who should buy his product, the client usually says "everyone." This is why the client has not been successful in generating sales. No producer can afford to persuade everyone to buy his product. The vast majority of buyers' buttons range between lukewarm and cold. The copywriter must find a way to sell the client on marketing his product to a select list: people whose hot buttons match the product's unique selling proposition. The copywriter searches for the product's unique selling proposition in the eyes of those few buyers who are likely to respond to the offer. What a copywriter wants to hear from a client when he asks who should buy the product is this: Hardly anyone, but the few who should buy it really do need what my product offers. They know this, so all you need to do is write an ad that shows them why my product meets their need. Then ask them to buy it. That makes the assignment much easier.
The seller wants to get cooperation from highly specific buyers. He also wants lots of specific buyers. More than any company in history, Amazon provides highly specific products to a gigantic audience of buyers. It has successfully combined the one and the many. Many customers with many tastes buy from one company. It keeps growing. But it does so at a cost: almost no profits. Amazon is the least profitable of any successful company in history. It exists to serve customers. It cuts prices. It increases services. Its stock price has skyrocketed, but its profits are dismal. It extends its market share, but it does not produce profits. This has made its founder, who is its major shareholder, one of the richest men in history.
The pencil is a versatile product. It is specialized as a writing implement, but it is the most versatile of all writing implements. It is also the cheapest writing implement. Parents can buy lots of them for their children. If a child breaks a pencil, the parent can replace it inexpensively. A wood pencil is durable. Its point wears out, but it lasts a long time.
In 1984, when microcomputers were reaching a wide market, the killer app was the word processor. By then, I had been using word processing for four years. That year, Peter McWilliams wrote a book titled The Word Processing Book. It became a best-seller. It was a book about the common pencil. He showed that the main advantages of the digital word processor were also available from a pencil. The book was a joke, but it was a clever joke. It made a good point. The pencil was the best available word processor for most people.
I write the outlines for each chapter in this book with pencil and paper. I never learned how to type with all ten digits. I use only my index fingers. For me, a pencil is easier and faster to use for making simple notes.
A pencil is cheap to buy because it is cheap to manufacture in large numbers. It is a mass market product. The profit margins are small. It is an old market. Few manufactured products are older. There are few products from 1580 that the average person could use today, yet which is still a mass market product. The pencil is one of them. One of the pioneers in pencil-making in America was the father of author Henry David Thoreau. The company's profits enabled the son to spend 1845--47 close to Walden Pond writing Walden. He used a pen. But maybe he used a pencil for the outline. I like to think so. After two years, he went back into the family's business. Nature was his avocation. Pencil making was his vocation.
People are not dependent on pencils. They never have been. But the skill of writing spread far more rapidly with pencils than with any other writing implement. They were cheap. "When the price falls, more is demanded." Our dependence on pencils is more like convenience than dependence. Entry into pencil production is open to all. No one has a monopoly on making pencils. For non-specialists, one pencil is as good as another. But if you go onto Amazon, you will find highly opinionated reviews of specific brands. The users have sharpened their pencils before using their keyboards. Opinions vary.
Opinion #1: Don't get me wrong these are very good pencils, they are easily sharpened, the leads don't break while sharpening and the eraser is well attached. But you know what if you boast that these are the world's best pencils then I'm expecting something spectacular, and in that sense they fail.Opinion #2: Absolutely the worst #1 lead pencil I have ever used. Using this pencil feels as if you are writing on sand paper.
Opinion #3: These pencils are terrific and lay down a very smooth layer of lead that is easily erased, if need be, by the excellent eraser on the pencil.
In short, "you pays your money, and you takes your choice." There are lots of choices among pencils. None of them is life or death.
The pencil is not complex. There is a huge system of production that makes possible the production of a single pencil, but the components are simple. This is why it was a good example for Leonard Read to use. We can understand a pencil's components. We cannot understand the components of all the tools necessary for the production of pencils. In his authoritative book, The Pencil (1989), Henry Petroski estimated that there are at least 125 separate manufacturing processes in the production of one seemingly simple pencil (p. 210). But each of these processes requires capital equipment and raw materials. Some of these are highly complex. The degree of economic interdependence to create a pencil is beyond any man's comprehension.
Read wrote his essay in 1958. The previous year, according to Petroski (p. 12), one expert in the manufacture of pencils estimated that it would cost a do-it-yourself hobbyist $50 to produce a single pencil. On what it would cost in today's dollars, use the inflation calculator of the Bureau of Labor Statistics (http://bit.ly/BLScalc). It will be close to $450.
The story of the free market is the story of the reduction of the twin curses on Adam and the ground. The market's complex system of exchange developed early in man's history. The division of labor was extended by the development of money. Money made possible a vast increase in the number of exchanges. People could exchange their specialized output for money, and then use money to buy other men's output.
The market extended the dominion of man over nature. It reduced the cost of production. As costs fell, competition among sellers reduced prices. "When the price falls, more is demanded." More cooperation was the result of falling prices.
Cooperation is between buyers and sellers. Competition is among buyers, and also among sellers. Competition within these two groups is the basis of cooperation between members of both groups. It is a fundamental misunderstanding of competition to think that society needs cooperation rather than competition. If a society is to achieve greater cooperation, it must allow greater competition. Competition among producers increases the number of specialized options offered for sale. This lets buyers gain a far wider range of choice. This reduces the dependence of anyone on a particular producer. But the cost of this reduction of dependence on any one product or company is the creation of far greater dependence on the free market's system of exchange.
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