Chapter 15: Production and Distribution
Updated: 1/13/20
Christian Economics: Teacher's Edition
About that time there arose no little disturbance concerning the Way. For a man named Demetrius, a silversmith, who made silver shrines of Artemis [Diana], brought no little business to the craftsmen. These he gathered together, with the workmen in similar trades, and said, “Men, you know that from this business we have our wealth. And you see and hear that not only in Ephesus but in almost all of Asia this Paul has persuaded and turned away a great many people, saying that gods made with hands are not gods. And there is danger not only that this trade of ours may come into disrepute but also that the temple of the great goddess Artemis may be counted as nothing, and that she may even be deposed from her magnificence, she whom all Asia and the world worship.” When they heard this they were enraged and were crying out, “Great is Artemis of the Ephesians!” (Acts 19:23–28)
This passage is an aspect of point three of the biblical covenant: ethics. It has to do with the market’s principle of distribution: high bid wins. There was no law against open bidding in the market place for the output of producers. When the principle of high bid wins is allowed to operate, there will be winners and losers among sellers. Sellers compete against sellers. Buyers compete against buyers. Falling demand is bad for existing sellers.
Demetrius understood the economic law of supply and demand. He understood that demand for his silver shrines was based on widespread faith in the supernatural power of Artemis-Diana, the goddess associated with the city of Ephesus. The temple was known across the Mediterranean. It is numbered among the legendary seven wonders of the ancient world. This demand for household shrines, meaning idols, was under assault from Paul, who was preaching salvation through faith in Jesus Christ, who was God incarnate. If the new faith spread, it would put Demetrius out of business.
He called together other craftsmen who supplied him with products. He warned them that their businesses were at risk, just as his was. He sold to final users. He bought support materials from these craftsmen. He understood that maintaining consumer demand was the key. If the producers were not successful in persuading buyers to buy the products of their hands, they would have to go into another market. They would still be competent craftsmen, but they would have to leave their profitable niche markets associated with the goddess, and produce silver goods that were less in demand. Their income would necessarily fall.
Demetrius understood that consumers direct production, not producers. Consumers own money. They can buy almost anything that is for sale. Producers must subordinate their skills to consumers if they expect to get paid.
The craftsmen who were called together recognized that their income depended on the marketing prowess of Demetrius. His production brought “no little business to the craftsmen.” As Americans say, they knew where their bread was buttered. They also knew who was doing the buttering. Demetrius would not have butter to spread around if buyers stopped buying his shrines.
This story reminds us of this fact of economic life: production and distribution are a single process. Whatever it was that the craftsmen were selling to Demetrius, he was making a market for their output. He was a middleman in a connected system of production and distribution. If he lost his market, they would lose their market. If his ship sank, their lifeboats would go down with his ship. They were all in this together, he warned them. They agreed.
Economist Murray Rothbard commented on an error that he called the fallacy of distribution.
Ever since the days of early classical economics, many writers have discussed “distribution theory” as if it were completely separate and isolated from production theory. Yet we have seen that “distribution” theory is simply production theory. The receivers of income earn wages, rent, interest, and increases in capital values; and these earnings are the prices of productive factors. The theory of the market determines the prices and incomes accruing to productive factors, thereby also determining the “functional distribution” of the factors. “Personal distribution”—how much money each person receives from the productive system—is determined, in turn, by the functions that he or his property performs in that system. There is no separation between production and distribution, and it is completely erroneous for writers to treat the productive system as if producers dump their product onto some stockpile, to be later “distributed” in some way to the people in the society. “Distribution” is only the other side of the coin of production on the market. (Man, Economy, and State, Chap. 9, Sect. 5)There are critics of the free market who deny its legitimacy because of inequalities of wealth. They want the civil government to intervene to redistribute wealth. They say this will not change production. It will only change distribution. Rothbard had an answer.
Many people criticize the free market as follows: Yes, we agree that production and prices will be allocated on the free market in a way best fitted to serve the needs of the consumers. But this law is necessarily based on a given initial distribution of income among the consumers; some consumers begin with only a little money, others with a great deal. The market system of production can be commended only if the original distribution of income meets with our approval.This initial distribution of income (or rather of money assets) did not originate in thin air, however. It, too, was the necessary consequence of a market allocation of prices and production. It was the consequence of serving the needs of previous consumers. It was not an arbitrarily given distribution, but one that itself emerged from satisfying consumer needs. It too was inextricably bound up with production (Ibid.)
Production and distribution are irrevocably linked. The system moves from producers’ initial expectations about consumers’ future purchases to the actual purchases. Any attempt by the civil government to restructure distribution will inevitably restructure production. Any exchange in demand will affect future supply.
Demetrius understood this. He wanted the authorities to intervene. He was unsuccessful. A town official announced:
If therefore Demetrius and the craftsmen with him have a complaint against anyone, the courts are open, and there are proconsuls. Let them bring charges against one another. But if you seek anything further, it shall be settled in the regular assembly. For we really are in danger of being charged with rioting today, since there is no cause that we can give to justify this commotion.” And when he had said these things, he dismissed the assembly (vv. 38–42).
When a buyer transfers money to a seller, this does three things. First, it registers demand. Sellers are alerted to the existence of demand at some price. So are buyers. Second, it validates the plans of a particular seller. This has a tendency to persuade the successful seller to keep producing. There is positive net income now; there may be later on. Third, it invalidates the plans of rival sellers. This sends a warning to them: “Stop doing whatever you have been doing. It is not working.”
A purchase reaffirms the division of labor. It confirms trust. The buyer has depended on the free market to deliver the goods. It has done so once again.
Because a specific buyer has made a purchase and has therefore removed the item from the open market, other bidders are alerted to the fact that their bids were not high enough to secure ownership. This information will be of use to some of those bidders who failed to place the highest bid. They will have to adjust their plans in terms of new information. They will have to bid higher next time, or perhaps find a seller who is willing to sell cheaper. Accurate information is not a free resource. Their participation in the market has provided them with more accurate information. It has forced a re-allocation of their budgets and plans. This is a major service provided by market competition. Millions of beneficiaries are free riders. They get the benefits of better information free of charge. Others must pay: time, research, or defeat at an auction.
The market process promotes plan reconciliation. Without a central planning committee issuing orders, buyers adjust their expectations and their offers for cooperation. Changing prices are the sources of most of the motivation to change. They reveal an objective reality that those who want to participate in a particular market can put to productive use.
A seller is looking for confirmation. He wants sales to validate his overall plan, from the decisions regarding product, buyers, and pricing through the marketing campaign. He faced uncertainty. Now he wants to make profits. If he does, he will probably repeat the process.
If he does not gain his expected sales, he will have to adjust his plan. He may have to reduce output. He may have to adopt a new marketing plan. He may have to redesign the product. It is his task to decide what to do. He specializes in this market. His specialized knowledge is what gives him a competitive edge.
If the state intervenes to change the previous system of buyers’ bidding in order to attain a different outcome, the seller will have to adjust production. This is why it is incorrect to argue that production is separate from distribution. The seller faces new conditions. The information he gained from previous marketing campaigns is now obsolete. The buyer is the state, not a group of independent buyers. The state is acting as a representative of a different set of buyers. The politicians have purposes different from the purposes of the now-displaced buyers. They will also have different plans, different rules, different sanctions, and different patterns of purchases.
There will be different price signals. Practices that were profitable when selling to the private sector will no longer be profitable. Sellers will have to adjust.
When there is a single buyer, uncertainty increases for sellers. The law of large numbers is no longer applicable. Accurate predictions become more difficult to obtain at the old low price. It is easier to predict accurately what a crowd will do than it is to predict accurately what an individual will do. When the individual is a committee of salaried government bureaucrats who cannot be fired for cost overruns, uncertainty prevails among sellers who do not have political influence.
The structure of production begins with forecasts, and it ends with the delivery to buyers. Sales may be at the prices and costs originally estimated by sellers, or they may not. There is always uncertainty in any plan. Men are not omniscient. The production process is integrated. There are competing marketing plans. Without this, sales become more uncertain. This means that the process of production involves distribution.
The manufacturer of pencils may sell directly to buyers. This is more likely in the case of sales on the World Wide Web. The manufacturer does not have to set up retail outlets. But it is more common for a pencil manufacturer to sell to a retailer, who sells to the buyer. This reduces the manufacturer’s need to gain knowledge of local conditions and marketing practices. Retailers bear the expense of generating final sales.
Distribution is performed by third parties. This may make seem as though distribution is separate from production. But distribution is part of an integrated marketing plans established by manufacturers. They have factored in a return on investment that includes the retailer’s share of retail income.
A buyer sees only the results of production. He has no idea regarding the complexity of the production process, as Leonard Read’s essay explains. But a buyer does have knowledge of the kind of pencils he wants. He has bought similar pencils in the past. He is probably conservative with respect to the look and feel of the pencil, but especially its hardness. These are a matter of taste. The pencil industry cannot change most buyers’ tastes. The advertising costs would be too high. So, the industry responds to traditional demand. It does not spend a lot of money on advertising because it is not worth the buyer’s time to experiment with new designs. The tried and true plans satisfy most demand. Under these conditions, distribution is somewhat automatic. Distribution is more clearly a part of the overall process: seamless.
An outsider might conclude that the civil government could intervene into the distribution process without disrupting production. Nothing changes much in the production of pencils. But if bureaucrats were to intervene, demanding changes in the production mix, they could gain cooperation only by making it profitable for the manufacturers.
In fact, such intervention is unlikely. Pencils are peripheral to the economy. They are cheap. They are not essential. Therefore, there is no organized political voting bloc that has the redistribution of pencils high on its agenda.
Demand as registered in the form of sales shapes all production in a free market economy. The manufacturers plan production in terms of what they think they can sell at prices that will produce an above-average return on investment: profit. They buy low, if they can, in order to sell high.
Changes in consumer tastes can affect the chain of command. Consumers are at the top of this chain of command. This is because they possess money. Manufacturers desire to obtain money from them. To do this, they must deliver goods that consumers regard as more valuable to them than the money it takes to purchase them. This production process requires individual plans. When implemented, a well-designed plan leads to profits. This plan involves multiple stages of production. It may not involve retailing, but mass production has done so in the past. This way, producers gain the cooperation of local specialists in selling to local populations. This makes use of the division of intellectual labor.
The fact that retailing is part of the structure of production leads critics of the free market to conclude that, although the production process is legitimate, the distribution process is not. Why not? Because it favors people who have money to spend. It ignores the poor. The production process, they argue, is a matter of engineering. But the distribution process the result of hucksters who sell to people with too much money. What is needed, they say, are armies of government bureaucrats who possess the authority to substitute a different system of distribution. They substitute bureaucratic management for profit management. The former is governed by thick administrative rule books. The latter is governed by a command: “Make a profit.” The former is top-down: commands issued by government agencies based on books of rules written in the past. The latter is bottom-up, with consumers on top: “Keep them happy.” The former is past-oriented: “Do things by the book.” The latter is future-oriented: “Make a profit in the future.”
The consumers are in charge. That was what Demetrius discovered when Paul’s converts ceased buying household silver mini-shrines. Demand fell. Sales fell. Income fell. He wanted something be done about this. He did not know what.
This was early in the history of the church. If Demetrius had been living in modern times, he could have shifted from producing silver shrines to silver crosses, or maybe silver bracelets stamped with WWJD (What Would Jesus Do?). “If the market changes, adjust production!” But he was also a faithful adherent to the religion of Ephesus. “She may even be deposed from her magnificence, she whom all Asia and the world worship.” He wanted Paul silenced. This was a war of the worldviews. This war had effects in the business world of Ephesus.
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