Conclusion to Part 1
Christian Economics: Teacher's Edition
Now faith is the assurance of things hoped for, the conviction of things not seen (Hebrews 11:1).
Faith is basic to the lives of all people. Most of what we believe we take on faith. We have not scientifically examined everything we believe. Most of what we fervently believe is not subject to the rigorous but narrowly focused techniques of scientific testing. We believe it anyway.
Leonard E. Read fervently believed in the productivity of human creativity. So do I, but it is not the foundation of my worldview. It was for Read. He called the free market a miracle, meaning a miracle of creativity. I do not call it a miracle. I call God’s creation of the cosmos in six days a miracle. In contrast to Read, I call the free market economy a predictable institutional result of society’s acceptance and enforcement of these principles, all of which are mandated in the Bible: the doctrine of linear time, the doctrine of ethical progress (progressive sanctification), private property, the rule of law, civil laws against theft, taxes below ten percent of income, men’s strict legal responsibility for their actions, the rejection of envy, wealth as a confirmation of the covenant, and men’s commitment to leaving an inheritance to their grandchildren.
Why did Read refer to a pencil as both a miracle and a mystery? First, it is the outcome of innumerable decisions. Second, there is no central planning agency coordinating these decisions. There could not be such an agency. No one knows how to make a pencil. Yet a pencil is common. It is also quite simple. Think of complex products as far greater miracles and far greater mysteries. How could this be? Read said it is the product of an Invisible Hand. But Read did not believe in a supernatural being that is shaped like a hand, yet invisible. The phrase is a metaphor, one coined by Adam Smith in 1759 and used again in 1776.
People do not trust their futures to a metaphor. They want to believe in a world with causation based on ethics, where good things happen to law-abiding, ethically righteous people. This is what they teach their children. They do not teach their children to trust in an Invisible Hand (capitalized).
What is the source of the market’s remarkable ability to produce wealth? God or man? If man, does this mean as individuals or the state? How is the system of economic cause and effect sustained?
Here is Read’s position:
1. There is no mention of sovereign purpose.
2. There is no planning agency, only innumerable plans.
3. There is plan coordination. He did not explain what or how.
4. There is no mention of profit and loss.
5. The pencil is a predictable miracle.
This autobiography of a pencil was not a logical defense of the free market. It was clever as a teaching tool, but it did not offer any theory of economic cause and effect. It is not a substitute for a causal explanation.
I offer a rival theory of the origin of a pencil.
1. There is cosmic purpose: God’s.
2. There is a central plan: God’s. He delegates authority.
3. There is plan coordination through market-generated prices.
4. There are profit-and-loss accounting techniques.
5. The pencil is predictable, not a miracle.
Christian economics denies that the economy is autonomous. It also denies that economic laws are autonomous. Everything is providential.
Humanistic economists see the economy as autonomous. They see all law as autonomous: economic law and natural law. Law is not created by God. Economic laws are not really laws, they insist. They are patterns imposed by scarcity and men’s interactions with scarcity, including civil laws. These explanations are not convincing to most people. Most people want to believe that the world is governed by ethical cause and effect. They want to believe that there are moral laws, not just statistical patterns. They want to believe in God, not an autonomous universe. This is why they are attracted to humanistic statist economists who preach that the economic world should be operate in terms of moral purpose. Humanistic free market economists deny all this. They find that most people do not believe them.
Christians impute meaning to the universe. They believe that the world has meaning. It is not random. It is not meaningless. Christian philosophers argue that God imputes meaning to the world He created and now providentially sustains. They argue that God’s imputation is authoritative. Men’s imputations are derivative.
Humanists also impute meaning. They do this as individuals. They are philosophically divided as to whose imputation is authoritative. Innumerable individuals impute meaning. How can there be coherence? The same is true of economic value. Whose imputation is authoritative? Socialists say that the central planning committee’s imputation is authoritative. But in whose name judicially, and on whose behalf economically, does such a committee impute economic value? Socialists do not say. Keynesians say that the national politicians’ imputation is authoritative: budget surplus or deficit. They also say that central bankers’ imputations are authoritative.
Here are the covenantal questions.
1. Who’s in charge here? God, autonomous individuals, or the state?
2. To whom do I report? The free market or the state?
3. What are the rules? Private property rights or central plan targets?
4. What do I get if I obey? Profits or a medal?
5. Does this outfit have a future? On what basis?
There is no agreement on the answers to these questions. The answers are a matter of worldview. They are a matter of faith.
I have built a case for economic coherence in terms of an analogy: an auction. But I have argued more than this. I argue that a local auction is a microcosm of the international auction known as the free market. Put differently, the microeconomics of a local auction is the macroeconomics of the free market. The reason why microeconomics is a valid representation of macroeconomics is because there is only one system of economics. It applies locally and internationally because its organizing principles are the same: private property, open entry, and the legal right to make a bid. The fundamental operational principle of an auction is this: high bid wins.
I am unaware of any other book on economics that is structured in terms of the auction process. Other free market economics accept the principles of the free market economy: private property, open entry, voluntary exchange, and free pricing. They use these principles to explain the market process. They believe in the principle of high bid wins, although with this modification: most of the time. But they do not begin with a statement of equivalency: auction and market.
As an analytical strategy, the principle of equivalency is superior to rival views of the market process. Why? Because an auction is analytically simple. In teaching, it is best to go from simple to complex. This was why Read told the story of a pencil. A pencil is simple. The system of voluntary cooperation that produced it is complex. The auction process is also widely known, just as a pencil is. In teaching, it is best to go from the known to the unknown.
There can be no sale without a buyer and a seller. Every buyer is a seller, and vice versa. Each party gains something by surrendering something. It is not possible to understand an auction without examining both the buyer and the seller. The same is true regarding the free market economy. This is why I devote space to discussions of both the buyer and the seller.
The heart of the auction process in the free market is the profit-and-loss system. There is a system of bidding: buyers vs. buyers, sellers vs. sellers. Out of this system comes an array of money prices. These prices reveal the limits of human action. Everyone asks himself: “What can I afford to pay?” People have subjective preferences. People order these hierarchically: first, second, third. People’s subjective preferences are limited by objective prices.
People look ahead. They plan for the future. They buy and sell in the present as a way to deal with the future. Out of these plans come profits and losses. For the buyer, a profit is found when he pays less than what he was prepared to pay: consumer’s surplus. For the seller, profit is a net return after all expenses have been paid: seller’s residual. The quest for profit drives the free market economy. Profits are positive sanctions. Losses are negative sanctions. These sanctions determine winners and losers. This system of sanctions is inherent in the free market. They are endogenous. They are not applied from any institution outside the free market. They appear to be autonomous. They are not autonomous, as I showed in Chapter 12 of the student’s edition. Christian economics shows that a higher morality undergirds the market process. The market does not rest on autonomous and non-moral patterns. It rests on the laws of God against theft.
If you want to understand the differences separating the rival schools of economic opinion, start with this premise: “The high bid should win . . . most of the time.” Pay attention to the qualification: “most of the time.” Why not all of the time? Here is where self-professed ethically neutral economists sneak ethics into their analyses.
Throughout the history of economic thought, there has been a debate over the legal and moral foundations of the free market. Is the free market’s system of production autonomous, or is it under the authority of the state?
A handful of economists have said that it is autonomous. The state has no legitimate function, either morally or practically. The most notable of these economists was Murray Rothbard, who died in 1995. He persuaded dozens of other economists, but there have never been many. All other economists believe that the market is not autonomous. It derives moral and judicial support from the civil government.
Economists have long debated these questions. First, what is the justification of state authority over the market? In which area of life? Second, who speaks for the state? On what basis? Third, what are the moral and legal limits of state intervention? How can we know? Fourth, which social sanctions are inherently political, and which are the outcome of market competition? Fifth, what system of ownership produces the highest rate of economic growth? I will cover these issues in Part 3. But first, I must defend the idea of the morality of the auction process.
There is more to economics than the market process, as we shall see. Put in the terminology of Ludwig von Mises, there is more to praxeology than catallactics.
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