Updated: 1/13/20
Christian Economics: Teacher's Edition
For what does it profit a man to gain the whole world and forfeit his soul? (Mark 8:36).
This passage is an aspect of point four of the biblical covenant: judgment. It has to do with the final judgment. Jesus warned people to impute value to their souls on the day of judgment. Then they should impute value to their worldly possessions. Jesus warned that not even if a man owned the whole world would this do him any good on judgment day. He would suffer a loss. So, possessing far less than the whole world would produce an even greater loss.
From an economic standpoint, profit and loss are aspects of uncertainty. We do not know the future perfectly. We are not omniscient. God is. We are not.
We live in the present. We are moving steadily into the future. We must therefore forecast the future. We must make plans to deal with the future. But we see things imperfectly. We therefore face the possibility of losses. But if we plan better than our competitors, we also have the possibility of making profits. I have discussed this in greater detail in Chapter 14 of Christian Economics: Student’s Edition: “Entrepreneurship.” We are all entrepreneurs.
Jesus’ warning on profit points to this time-based aspect of profit and loss. Jesus contrasted the maximum profit and the maximum loss. If you could profit by becoming the owner of the whole world, but this would cost you eternal life, it would be a bad exchange. This is the choice between worshipping God and worshiping mammon. The best that mammon could offer anyone is the whole world. This would not be a wise trade: eternal life for temporary dominion over everything. Jesus was saying that mammon’s offer is insufficient to offset the impending loss. Here is mammon’s offer: “more for me in history.” Here is Jesus’ offer: “But seek first the kingdom of God and his righteousness, and all these things will be added to you” (Matthew 6:33). Jesus warned people to count the cost. (I go into this in greater detail in Chapter 17.)
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).
This requires that we look into the future. We must make estimates of future costs and benefits. We do not see things clearly. “For now we see in a mirror dimly, but then face to face. Now I know in part; then I shall know fully, even as I have been fully known” (I Corinthians 13:12). But we see well enough for God to hold us responsible for our actions.
Jesus’ warning about the trade-off between the whole world vs. the loss of one’s soul made it clear that men must assess the future value of their present actions. The stakes are eternal life and death. We read of the second death. “Then Death and Hades were thrown into the lake of fire. This is the second death, the lake of fire. And if anyone's name was not found written in the book of life, he was thrown into the lake of fire” (Revelation 20:14–15). This is what Jesus meant when he warned of the loss of men’s souls, “where their worm does not die and the fire is not quenched” (Mark 9:48). This has to do with the future: the eternal future. Jesus warned men of the choice they must make between eternal life and eternal death. These are as high as the stakes get in life. God gave the Israelites an analogous warning.
See, I have set before you today life and prosperity, and death and adversity; in that I command you today to love the Lord your God, to walk in His ways and to keep His commandments and His statutes and His judgments, that you may live and multiply, and that the Lord your God may bless you in the land where you are entering to possess it. But if your heart turns away and you will not obey, but are drawn away and worship other gods and serve them, I declare to you today that you shall surely perish. You will not prolong your days in the land where you are crossing the Jordan to enter and possess it. I call heaven and earth to witness against you today, that I have set before you life and death, the blessing and the curse. So choose life in order that you may live, you and your descendants, by loving the Lord your God, by obeying His voice, and by holding fast to Him; for this is your life and the length of your days, that you may live in the land which the Lord swore to your fathers, to Abraham, Isaac, and Jacob, to give them (Deuteronomy 30:15–20).
God ultimately offers this choice: life and prosperity vs. death and adversity. Gaining the whole world sounds like a benefit. But there is no benefit without an increase in personal responsibility (Luke 12:47–48). This burden of worldwide responsibility would be crushing. It would constitute adversity, followed by death. A wise man would know better. Mammon’s offer inevitably involves an increase in responsibility: “more for me in history.” You gain the whole world, but only at the cost of your soul.
A covenant breaker looks at his eternal future and discounts the cost to zero. This was what Adam did when he ate the forbidden fruit. He sees only the possibility of gain in history. He sees winning the world as a net benefit. But in making this assessment, he discounts the cost in eternity to zero.
God will impute value retroactively to each person’s work on the day of judgment. This is the archetype of profit and loss. Analogously, consumers will impute value retroactively to the work of entrepreneurs. They will buy or refuse to buy the output of entrepreneurs.
Business profit comes from an accurate assessment of what buyers will do in the future. Entrepreneurs buy today the goods and services they need to produce finished products or services in the future. They buy low, they hope, in order to sell high, they hope. They can buy low only because their competitors do not see an opportunity in the future. Their competitors do not bid up the prices of production goods. If their plans work out, they will make a profit. If not, they will suffer a loss. This is the basis of both profit and loss. Both will be determined in the future by customers.
A buyer decides at some point whether to buy or not buy. His decision is final. He assesses the comparative value of the options to him because he owns money. He has a wide range of opportunities because money is the most marketable commodity. He compares prices. Whenever he believes that he can maximize net value from a purchase, he buys.
A buyer is an entrepreneur. (We are all entrepreneurs.) He begins in the present. He makes guesses about what he needs and wants in the present. Then he guesses what he will need and want in the future. He decides how to allocate his money in terms of his assessments of his present needs and wants in relation to his future needs and wants. He discounts the value of future needs and wants in relation to the value of present needs and wants. Then he guesses about how much income he will have between now and then. Then he allocates his funds among these options: consumption, savings, speculative investments, taxes, and charity. He may also consider tithing: the biblically mandatory support of his local church. (http://CovenantalTithe.com)
He seeks to make a profit. What is profit from a buyer’s point of view? It is his ability to buy something cheaper than he expected. Then he can do other things with the money he had not budgeted. Economists call this a consumer surplus. I call it profit.
Money reduces a buyer’s uncertainty. It can be used to buy almost anything. He is less vulnerable to unexpected events if he owns money. Here is another way of describing this. He is dependent on a wide range of sellers, not just on a few local sellers, which would be the case under barter. A broad market reduces his dependence on a handful of suppliers. This is why money reduces his uncertainty.
A buyer is often an economic agent for those under his lawful authority. This includes family members. He acts on their behalf. A buyer may also be the economic agent of an employer. He acts on the employer’s behalf and also in his name. He is a legal agent as well as an economic agent. He seeks a profit for everyone he represents.
A seller is more obviously an entrepreneur. He seeks a profit. This profit is assessed by accounting techniques. It is assessed by what is sometimes called black ink: more income than outflow. Red ink represents losses: less income than outflow. The seller seeks a positive rate of return in terms of money.
He imputes subjective value to the profits gained. This may be as an entrepreneur competing against other entrepreneurs. He seeks to do better than they do. His performance is evaluated in terms of money. Who does this evaluation? He does. Also the public, other entrepreneurs, and investors in the company’s stock. Last, but hardly least, the tax collector assesses profit or loss. The entrepreneur’s rate of profit depends on how much the tax collector extracts. What he made pre-tax is less important than what he keeps post-tax.
How does he make a profit? By buying low and selling high in terms of money. He can do this only when he accurately forecasts the future revenues gained from sales of his products, and he also forecasts what it will cost him to manufacture or purchase of these products in order to sell to buyers. None of this is guaranteed.
He makes his profit based on specialized knowledge. He knows how to deliver products to buyers at prices they are willing and able to pay. He sells in a niche market. Not many people know how to do what he knows how to do. He takes his specialized knowledge and uses it to serve future buyers.
To succeed, he must bid for production goods: raw materials, labor services, capital equipment, building space, transportation services, and public utilities. He bids against other producers. The high bids win. Entrepreneurs do this, economically speaking, as the economic agents of specific customers in the future. If entrepreneurs are successful in bidding away producers’ goods from their competitors, the people who buy from them in the future will be beneficiaries. Economically speaking, these customers will outbid their competitors. Buyers compete against buyers. Sellers compete against sellers.
Pencil manufacturers make money by selling pencils to buyers. They may not make a profit. A profit is not the same as income. Income may be sufficient to pay for all of the production goods, plus salaries to managers. The owners receive dividends equal to what they could make if they sold the business and invested in another pencil company. But there is no extra money called a profit. Profit is a residual for accurate forecasting and planning. The pencil industry is so old that there are not many profit opportunities to exploit. The business pays for factor inputs, but it does not make anyone rich. There is little unexploited knowledge. There are few savings to be had.
It is possible that some producer will make a breakthrough. If it proves to be profitable, it will be copied by competitors. Whatever the advantage is, it soon becomes conventional. Output increases. But then in order to sell the extra pencils, the company must cut prices. So must other companies. The beneficiaries of the breakthrough will be the buyers.
The innovation may be invisible to buyers. All they see are yellow pencils with pink erasers. But if the innovation decreased production costs, there will be more production. This will increase the supply of pencils. To sell these extra pencils, there will be price cuts. It is highly unlikely that a pencil company will be able to sell more pencils by increasing the advertising budget with the money saved in production. When was the last time you saw an advertisement for a pencil? The company will lower its prices. This is the usual result of innovations in production. Buyers get to buy more pencils because pencils are cheaper. This is the law of demand: “At a lower price, more is demanded.”
The quest for profit has driven pencil makers to improve the quality of pencils and cut prices. In 1845, a typical pencil cost five cents. In terms of today’s prices, that would be at least a dollar. The pencil in 1845 had no eraser. Today’s pencil can be bought for about seven cents when bought in bulk: 144 pencils. This would last most families several years. The price is not worth budgeting for most industrial nation families.
Worldwide, over 14 billion pencils are sold every year. The quest for profit by manufacturers is no longer the primary driving force. The quest for predictable income is. Worldwide, there are fewer than 200 pencil companies, about one per nation on average. This is not the result of government favoritism. Most governments ignore the pencil market. It is the result of centuries of manufacturing. It no longer pays innovators to enter the market for pencils. There is no major profit potential for innovation. Buyers and sellers know what the market will be next year. Buyers pay no attention until the day they buy. Producers from outside the industry pay little attention because the pencil is a mature product in a mature industry. But production continues day and night.
Inside a nation, a handful of manufacturers supplies most of the pencils. This is an old industry. Innovations in production are few and far between. They are easily imitated.
Customer tastes are set. Buyers do not devote research into the latest developments of pencils. Buyers rely on market competition to make familiar looking and familiar performing pencils. They can trust this market because it is old.
Similarly, buyers know that they will have a reasonably predictable number of sales. There is some loyalty of buyers. Buyers are buying familiarity, not innovation. Those who pay no attention to the brand and the hardness will buy whatever is in front of them when they shop. But they will probably shop at the same retail store to buy them this year. So, the sellers concentrate on selling to the retail outlets, not the final consumers.
The ethical standards of the pencil manufacturers are high because the industry is old. Buyers know what they want if they pay any attention to the brand at all. This reduces the number of opportunities for cheating. It is too easy for buyers to switch to a rival brand. Remember, people fear losses more than they desire profits. It is more likely that a buyer will abandon a brand for poor performance than to switch to a new brand in order to gain new but untested benefits. A seller must persuade someone to switch to his brand. This is the most expensive form of advertising. The first sale is the most costly sale. It must overcome skepticism and fear of loss. But when a customer experiences a defective product, he goes looking for a competitor. Once lost, such a customer rarely returns. Manufacturers know this.
Profit and loss are economic categories related to accounting. But, analytically speaking, they are aspects of entrepreneurship. They are the results of economic forecasting and planning in terms of the forecasts.
The standard way to describe entrepreneurship is this: buy low, sell high. But how is this possible? How can we buy low? It is possible only because we do not know the details of the future. We do not know which economic factors will be dominant for a particular product in world markets. The less we know about a market, the more uncertainty will prevail. Profit and loss are the results of dealing with economic uncertainty. The presence of uncertainty is the primary opportunity for entrepreneurs to gain profits.
Both the buyer and the seller are entrepreneurs. They both must deal with an uncertain future. The primary motivating factor for a seller is to possess objectively more money rather than the same or less money at the end of a time period. The motivating factor for a buyer is to obtain more subjective value in the future than what he possesses today. Put differently, he wants to obtain greater value for his money than what he can buy today. The buyer is more self-consciously geared to economic value than the seller is. That is because the buyer possesses money. He can buy what he wants. The seller does not possess money. He cannot buy what he wants with his output. He must exchange his output for money. Then he will be able to buy what he wants. Then he will focus on value. He will be a consumer.
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