For which of you who desires to build a tower does not first sit down and count the cost to calculate if he has what he needs to complete it? Otherwise, when he has laid a foundation and is not able to finish, all who see it will begin to mock him, saying, “This man began to build and was not able to finish.” Or what king, as he goes to encounter another king in war, will not sit down first and take advice about whether he is able with ten thousand men to fight the other king who comes against him with twenty thousand men? If not, while the other army is still far away, he sends a delegation and asks for conditions of peace (Luke 14:28–32).
This passage establishes the biblical principle of counting the costs of our actions. The decision-maker is legally responsible for his actions. He acts economically on behalf of subordinates. This concept of personal responsibility underlies the biblical doctrine of economic allocation. The steward of property is a legally responsible agent before God. I argue that the free market is the most efficient system of economic organization because it establishes a tight judicial connection between private owners and the personal economic outcomes of their actions.
1. Covenantal Foundations
This chapter is an extension of the second law under judicial (theocentric) laws: God delegates ownership. In Chapter 2, I wrote: “This is delegated ownership. This is not original ownership. It is judicially based on God’s original ownership. Here is the supreme implication: this form of ownership is in no way autonomous. This is why Christian economics rejects any suggestion that there is autonomy in economic relationships. All wealth, including knowledge, is delegated by God to men” (2:C:2).
This chapter is also an extension of the second law under judicial (representative) laws: trustees possess authority. In Chapter 2, I wrote: “This authority is legal: the authority to allocate property among competing uses. Humanistic economists refer to this allocation process as economizing. This concept is basic to humanistic economics. Owners decide what to do with their property. Christian economic theory declares that owners are God’s legal trustees. Trustees decide what to do with God’s property. God holds them accountable for the use of His property, as we see in Jesus’ parallel parables of the talents (Matthew 25:14–30) and the minas (Luke 19:11–27)” (2:D:2).
This chapter is also an extension of the second law under stewardship laws: priorities structure planning. I wrote in Chapter 2: “Because we have limited resources, we have to allocate these resources in such a way that we hope to achieve our highest priorities. We will run out of resources before we run out of priorities. This is why we economize. This is the essence of resource allocation” (2:E:2).
2. Plan and Costs
Someone plans to build a tower. Building it is high on his list of priorities. He must now devise a plan to build it. He is constrained by a shortage of resources at the prices he was willing to pay. He therefore faces scarcity. He must trade either money or else something of value to secure the resources he needs to build the tower.
Jesus warned us to devise precise plans of action. A coherent plan requires the planner to make an assessment of costs. This is a present assessment of future costs. It involves forecasting. We call this art of forecasting “entrepreneurship.”
What does it mean to count the cost? This involves estimating subjective benefits at some point in the future. It also involves estimating the subjective costs. This is called a cost-benefit analysis. It is a forecast, not an exercise in retrospective accounting. Planning is an aspect of point two of the covenant. Assessing costs and benefits retroactively is point four. Point two and point four are always linked.
Jesus’ parallel parables of the talents (Matthew 25:14–30) and the minas (Luke 19:11–27) deal with the entire entrepreneurial process: forecasting, planning, implementing, and the day of reckoning. The parable of the talents appears in a passage dealing with God’s final judgment (vv. 31–46). Jesus presents the story of a rich man who allocates capital to three servants. He gives them coins (talents). Then he departs. He returns and demands an accounting. He assesses the performance of each servant. He then announces his judgment. This is an aspect of point four: sanctions/judgment. Two servants performed well; the third did not. He offers an excuse. He says that he had assessed the ethics of the master. He tells the master that he believed that he was a hard man, an unfair judge. So, he buried his coin.
Then the servant who had received one talent came and said, “Master, I know that you are a strict man. You reap where you did not sow, and you harvest where you did not scatter. I was afraid, so I went away and hid your talent in the ground. See, you have here what belongs to you.” But his master answered and said to him, “You wicked and lazy servant, you knew that I reap where I have not sowed and harvest where I have not scattered. Therefore you should have given my money to the bankers, and at my coming I would have received back my own with interest. Therefore take away the talent from him and give it to the servant who has ten talents. For to everyone who possesses, more will be given—even more abundantly. But from anyone who does not possess anything, even what he does have will be taken away. Throw the worthless servant into the outer darkness, where there will be weeping and grinding of teeth” (vv. 24–30).
The steward had made an inaccurate ethical assessment. He had assessed the ethics of the owner one-sidedly. Yes, the man was harsh, but only with stewards who were poor performers. He treated productive stewards well, giving them rewards. The poor performer had estimated only the potential cost of failure, not the potential benefit of success. This inaccurate assessment had led him to make an inefficient allocation of resources: the coin. He returned the coin that he had been handed. This was not good enough, announced the owner. He could at least have deposited the master’s money with bankers, who would have paid a rate of interest. (This is the strongest statement in the Bible in favor of interest-paying and therefore interest-collecting bankers.) So, the coin’s owner took the coin and handed it to the best-performing steward. He then cursed the unfaithful steward.
The unfaithful steward had made a second inaccurate ethical assessment. He had failed to understand the owner’s ethical standard. The owner did not reap where he did not sow. On the contrary, he reaped where he had sown. The steward had not understood that he himself was the soil into which the owner had sown seed that should have produced an abundant crop. The seeds that he had sown with the other two stewards had produced abundant crops.
This is the story of man’s history. There are winners and losers. There are faithful stewards and unfaithful stewards. They are all judged by the same standard. The owner departs for a time to see how they will perform. This is what God did in the garden of Eden. It is the archetype for entrepreneurship. It is based on a hierarchical allocation of assets: from God to men. They in turn must allocate these assets. There will be a day of final accounting.
3. Estimate the Benefits
The successful stewards had estimated the future benefits. They had wisely allocated the capital entrusted to them. They understood this biblical principle. “The one who sows sparingly will also reap sparingly, and the one who sows for the purpose of a blessing will also reap a blessing” (I Corinthians 9:6b). They had not been paralyzed with fear. They had understood that the owner was an honest man who would reward productivity with blessings. Jesus put it this way. “Give, and it will be given to you. A generous amount—pressed down, shaken together and spilling over—will pour into your lap. For with the measure you use, it will be measured back to you” (Luke 6:38). The context of this statement had to do with generous giving, but the same principle also had to do with wise investing. We read in Proverbs: “Be sure you know the condition of your flocks and be concerned about your herds, for wealth is not forever. Does a crown endure for all generations? You should know when the hay is gone and the new growth appears, and the time when the grass from the hills is gathered in. Those lambs will provide your clothing and the goats will provide the price of the field. There will be goats’ milk for your food—the food for your household—and nourishment for your servant girls” (Proverbs 27:23–27). This has to do with wise investing and careful management. So does this: “Look at the ant, you lazy person, consider her ways, and be wise. It has no commander, officer, or ruler, yet it prepares its food in the summer and during the harvest it stores up what it will eat” (Proverbs 6:6–8). The ant is self-motivated. It prepares for the future.
4. Subjective and Objective Forecasting
The forecaster must consider both his future income and his future costs in terms of his present subjective assessment of future subjective economic value. He asks: “What will the benefits and costs be for me?” This is an aspect of point four: imputation. He wants a net profit of benefits over costs. He imputes present value to an expected future economic condition. That condition will be both subjective and objective. To understand this, we must consider Jesus’ story of the king facing an invading army. When someone is counting the size of an invading army, this is an objective estimate. It is a matter of counting men and equipment on both sides. But there are also subjective elements, such as the subjective cost of lost honor. This subjective estimation of honor has kept armies intact on battlefields from the beginning of warfare.
In Jesus’ example of the looming battle, the forecaster is warned to count the benefits of peace. The king should ask himself: “Will my army be victorious?” Jesus identified this assessment. “If not, while the other army is still far away, he sends a delegation and asks for conditions of peace” (Luke 14:32). The estimated subjective benefits of peace without honor may outweigh the expected subjective costs of a defeat with honor. But there is unquestionably a pair of objective outcomes: defeat or victory. These are not figments of the king’s imagination.
Christian economics must take account of both subjective costs and objective costs. To ignore either is to make a conceptual mistake.
Christian economics insists that all ownership except God’s original ownership is delegated ownership. This means that ownership is a combination of trusteeship and stewardship. From the point of view of economic analysis, stewardship is secondary to trusteeship. The owner of the property ultimately acts in the name of God. But humanistic economics does not acknowledge this. Ownership is said to be autonomous. An individual owns something. He is responsible to himself.
The person who owns something cannot escape the responsibility of deciding what to do with whatever it is that he owns. There is an inescapable connection between responsibility and ownership. There is also an inescapable responsibility of ownership on behalf of somebody else. If something commands a price, it means that people are bidding for ownership of the item. If an individual owns anything that has a price attached to it, he faces the responsibility of deciding what to do with the asset. He can keep it. He can use it himself. But he will have to pay to do this. He will have to pay whatever he would have been able to sell the item for. He will pay for it with whatever the money would have bought, which he will not enjoy because he decides not to sell it or rent it.
This is inescapably a doctrine of representation. Representation is an aspect of point two of the biblical covenant. Inescapably, an owner represents God, and he also economically represents the person who is offering the highest price that he can get. He is holding that property in reserve. He may be holding it for himself. He may be holding it for the highest bidder in the future. He may be holding it for his covenantal heir.
What appears to be unencumbered ownership is in fact encumbered. It is encumbered economically because it has a price. The allocation decision as to who will become the owner in the future is the responsibility of the person who presently owns the item. This is another way of saying that ownership is a social function. Ownership is not autonomous precisely because the asset has a price.
Then there is corporate ownership. As is true of the Trinity, man is both one and many. There are individuals. There are corporate entities. Responsibility is therefore both individual and corporate. So, purpose is both individual and corporate. Men act in an environment, and this environment is in part social. Man is a social being. An individual selects his purposes and a specific concept of causation in terms of what he has learned from his membership in multiple groups. The concept of the autonomous individual is as incorrect as the concept of the autonomous group. Christian epistemology must affirm both unity and diversity. Any discussion of economic causation must begin with both the acting individual and the acting group. It must begin with a discussion of the formation of individual plans as being, from the beginning, the product of previous plans that were themselves reconciled plans.
In discussing human action, we must begin with God as Trinity, as revealed in Genesis. We must not begin with Robinson Crusoe or any other solitary decision-maker. A true Crusoe is an heir of all of the implemented plans that influenced his thinking. He is responsible before God for a kingdom-enhancing formulation of new plans and their implementation. He is not autonomous. He is an heir of capital supplied by God. The most valuable form of capital is accurate knowledge, coupled with the wisdom and courage to implement it. The use of Crusoe is widespread in economic textbooks. While this teaching technique is legitimate for showing people’s priorities in the allocation of scarce resources, it is misleading. It assumes autonomy. There is no such thing as autonomy in the creation.
The person possessing assets must make a decision regarding the correct allocation of those assets. His sense of purpose will influence the plans that he makes for the allocation of these assets. As I have said in the previous section, purpose precedes planning. Planning involves the allocation of scarce economic resources. An individual decides what his priorities are with respect to a particular scale of values. He has certain goals in mind that are consistent with his overall purpose. These goals are hierarchical in the sense that there is a sequence to them: first, second, third. With whatever resources he possesses, he allocates them in such a way that he achieves the highest goals on his list of possible goals. He subjectively imputes value to each of the goals, and then he allocates objectively whatever resources he controls in order to attain these goals.
As an individual allocates wealth, probably money, in order to attain his goals, each successive goal that he attains is worth less to him than the immediately preceding goal, other things remaining constant. Of course, if his tastes change in the meantime, the next goal that he achieves may be of higher value than it was when he made the immediately prior expenditure. But, in order to explain how someone makes allocation decisions, economists assume that his tastes do not change in the meantime. Because each goal that he attains with his remaining money is lower on his scale of priorities or economic values, economists speak of declining marginal utility. This is a way of describing the motivation behind people’s expenditures. People are surrendering something of value: money, the most marketable commodity. Each expenditure is made in order to attain a goal that was lower on the hierarchical list of priorities than the previous goal. These decisions are individual decisions. They are decisions to do one thing rather than another. They are decisions that involve spending money on one thing rather than another. In other words, they are highly specific. They represent the purchase of this rather than that.
This outlook is basic to Christian economic theory. Why? Because God holds each person responsible for his thoughts, words, and deeds. This responsibility is comprehensive. Jesus warned: “I say to you that in the day of judgment people will give an account for every idle word they will have said” (Matthew 12:36). Paul wrote: “Whatever you do, in word or in deed, do all in the name of the Lord Jesus. Give thanks to God the Father through him” (Colossians 3:17). Personal responsibility always accompanies ownership. What we do with whatever God has delegated to us testifies for or against us. This is the message of the parallel parables of the talents (Matthew 25:14–30) and the minas (Luke 9:11–27).
We live in a finite world. We live in a cursed finite world. This is the basis of the doctrine of scarcity. This is the starting point for most economic theory. Each decision-maker has limited resources. He cannot achieve all that he wishes to achieve with the money he owns and the time remaining to him. This means that decision-makers have to budget both their money and their time. They have a hierarchical list of goals that they wish to achieve in a particular period of time. They know that they have limited time. They have to allocate their time carefully. The more money they possess, the more that they can achieve in the time that they have budgeted. Looking at it from the point of view of time, the less time they have remaining to them, the more wealth they must possess in order to achieve their goals. There is a constant trade-off between time and money. This is the dilemma of all budgeting.
An individual who budgets wisely asks himself three questions. (1) What do I want to achieve? (2) How soon do I want to achieve it? (3) What am I willing to pay? These three questions must be asked repeatedly when people make fundamental decisions. Then the individual must answer these questions rationally. He must assess the amount of time available to them to complete his project, and he must make an estimate on the amount of money available to him to complete the project.
1. Knowledge and Allocation
Individuals do not have clear knowledge regarding what they want to achieve. A person’s list of goals is long. The resources at his disposal to achieve these goals are limited. More importantly, he does not know the future. He does not know what new opportunities are going to present themselves. He does not know if he will learn something of value that will affect his decisions and therefore his allocation of resources. There is enormous uncertainty in life, and this uncertainty should be at the heart of economic analysis.
Jesus made it clear that we are to count the cost of our actions. But He did so within the context of uncertainty about the future. The person planning to build a tower or fight a battle had to forecast the most likely outcomes of his actions. So do we. In counting the cost of our actions, we must consider the future. There will be consequences for these actions. We must compare what we think will be the outcomes of various actions. Then we must compare the range of actions available to us within the framework of our budget. The decision to allocate resources is always a future-oriented decision.
2. Individual Budgeting
There is a saying in the United States: “You don’t want to run out of money before you run out of month.” This is the issue of budgeting. It is a matter of money vs. time. Both are objective constraints.
Most people have to budget their money. Only very rich people can afford not to budget their money. Adults who act responsibly learn how to budget their money. Jesus repeatedly warned that it is far more important to budget time. This outlook is basic to Christian economics. It is not basic to humanistic economics, which self-consciously avoids the question of the final judgment. Why is budgeting time more important, at least for people not facing starvation, i.e., a shortening of time? It is because you can earn more money by working more hours, but you lose hours. It is far easier to find ways to make more money than to find ways to extend your life. There are far more people who are ready and able to pay you money in exchange for your time than people who are ready and able to pay you extended life in exchange for your money.
Because of economic growth, there is a rising possibility that you will not die poor even if you are poor today. In contrast, there is almost zero theological possibility that you will not die. There are some Christians (premillennialists) who hold an eschatology that teaches that Jesus will soon come bodily to take His people to heaven, thereby enabling them to escape physical death. Other Christians (amillennialists) believe that the final judgment is close. They hope that they can avoid death this way. Members of both groups hope to get out of life alive. I do not recommend that you count on either of these scenarios as a way to avoid thinking about death. This slogan is true: “There are only two sure things in life: death and taxes.”
It is almost universal that people for most of their lives worry more about money than they do about death. Yet death is certain; poverty is not. Why do people worry more about money than death? Because they heavily discount the future negative sanction of death. Despite the inevitability of death, people discount it in their thinking. They prefer to believe that they have at least five years to live. In contrast, money allocation issues are immediate and constant. People are more concerned about running out of money at the end of the month than they are about running out of life at the end of the month. The risk is far greater that they will run out of money by the end of the month than that they will die by the end of the month, except in their final month. People can more easily put death out of their minds than put money out of their minds. The short-term cost of ignoring death is lower than the short-term cost of ignoring money. However, the long-term cost of ignoring death is infinitely great for covenant-breakers, due to the permanence of the lake of fire (Revelation 20:14–15). There will be no escape. Some people discount this inevitable cost by a very high discount rate. Others deny this cost altogether. This is the legacy of Adam and Eve, whose joint cost-benefit analysis was seriously flawed. This cost-benefit analysis is now built into fallen human nature.
You must allocate both money and time. You must decide what to do with your money, and you must decide what to do with your time. You must not pay more attention to budgeting your money than budgeting your time. The Bible warns against this mistake. It would not warn against it if this mistake were not widespread. The classic biblical example of this is found in Jesus’ parable of the man who owned crops and needed barns to store them. “I will say to my soul, ‘Soul, you have many goods stored up for many years. Rest easy, eat, drink, be merry.’ But God said to him, ‘Foolish man, tonight your soul is required of you, and the things you have prepared, whose will they be?’ That is what someone is like who stores up treasure for himself and is not rich toward God” (Luke 12:19–21).
People set priorities: goals. Then, if they do not change these goals, they take specific actions to achieve these goals. They allocate money, but they necessarily also allocate time. Because they are short of both money and time, but especially money, they allocate money to their highest priorities before they allocate money to priorities lower on their list. They understand that they have a limited amount of money. Because opportunities may change, they also understand they have a limited amount of time to take action. They cannot achieve everything that they would like to achieve with the time and money available to them. Their time and their money are objective constraints. In contrast, their scale of priorities is subjectively determined. This is the result of their individual subjective imputation, which is point four of the economic covenant: assessing economic value. This is called imputation.
Christian economics insists that economic value is also objective. God imputes value subjectively, but because it is God who imputes value, this value is also objective. We know this from the account of creation in Genesis 1. God worked each day. With the exception of day two, at the end of each day He declared His imputed value of His work: “It is good.” He also imputed value to his creation week: “It was very good” (Genesis 1:31b). God owns the creation. He has priorities for it. He also has a plan for it. He has established His decree for history. He will bring final judgment in terms of His ethical standards. He is constantly imputing value, both ethical and economic, to men and assets. He is the supreme Imputer of value.
Individuals are made in God’s image. Therefore, they are required by God to think God’s thoughts after Him. They are required by God to impute value as finite creatures analogously to God’s imputation of value. People cannot escape the task of imputation. Because God requires them to count the cost, they should impute this value in advance. They should make estimations. They do not know the future perfectly. “For now we see indirectly in a mirror, but then face to face. Now I know in part, but then I will know fully just as I have been fully known” (I Corinthians 13:12). But we do know in part. We are responsible before God and men for our use of this knowledge.
3. Individual Spending
It is not sufficient to budget in advance. The individual must also spend his time and his money in terms of his plan. James wrote: “Be doers of the word and not only hearers, deceiving yourselves. For if anyone is a hearer of the word but not a doer, he is like a man who examines his natural face in a mirror. He examines himself and then goes away and immediately forgets what he was like” (James 1:22–24). This is always easier said than done. Consider dieting. People make plans about cutting their intake of calories and increasing the time and intensity of their exercise programs, but they do not always follow through. The likelihood of their not following through is greater in most cases than the likelihood of their following through. The archetype of planning without following through in the Bible is breaking a vow to God. The following refers to a judicial oath, not simply a plan of action. “When you make a vow to God, do not delay to do it, for God has no pleasure in fools. Do what you vow you will do. It is better not to make a vow than to make one that you do not carry out” (Ecclesiastes 5:4–5).
One of the ways that people overrun their budgets is to borrow money. “The wicked person borrows but does not repay” (Psalm 37:21a). They place high value on repaying their immediate debt, but they place far less value on repaying the long-term debt that enables them to repay the short-term debt. It is easy to borrow money to meet an immediate obligation. Most debtors heavily discount the future economic cost of whatever they owe. They are present-oriented. This is the mark of the lower-class individual.
People’s tastes change frequently. They can change from day to day. When their tastes change, their priorities change. When their priorities change, their budgeting plans change. When their budgeting plans change, their spending patterns change. Humanistic economists have no way methodologically of dealing with changing tastes. There is literally no way to account for taste, given the presuppositions of methodological individualism. There are no objective criteria for evaluating subjective tastes. Economists do not know how or why tastes change. According to philosophically aware humanists, this is an aspect of Kant’s noumenal realm, which is not related causally to his phenomenal realm of science: mechanical or biological causation. Somehow, Kantians say, tastes do influence people’s actions, but there is no objective, scientific (phenomenal) way to explain this. If there were, then people would lose their freedom from either mechanical, impersonal causation or else manipulation by other people.
There is no escape from this interaction between subjective valuation and objective conditions. Prices are objective; individuals’ assessments of the importance of these prices are subjective. Allocation has to do with objective spending. But it also has a great deal to do with subjective evaluation of priorities and the subjective evaluation of the economic value of objective assets, such as money.
4. Collective Budgeting
Institutions have legal obligations. They also have limited objective resources, such as money, land, buildings, and equipment. Organizations’ leaders make legal decisions and economic decisions. These decisions have consequences in the lives of people who are in some way connected with these organizations.
The question then arises: “How in theory can organizations impute values subjectively?” There is an explicitly Christian answer: God is a Trinity. God is simultaneously one and many. God imputes value collectively as well as individually. Men are made in God’s image. Therefore, men can impute individually and collectively as God’s representative agents. Certain individuals in the organization have the legal authority to act as representatives of the collective owners of the organization. Ownership is collective. Decision-making is judicially collective. Yet this process of decision-making has to be subjective. Individuals subjectively impute economic value, and these individuals act as representative agents of the collective organization. Because organizations can be held legally liable for their actions, they must be treated objectively.
Organizations are required by law, custom, and economic circumstances to make definitive budgeting plans. If they do not, they will go out of business or out of operation. The objective conditions of supply and demand force inefficient organizations out of the marketplace. Organizations have priorities. These priorities rest on the subjective imputations of value by the decision-makers who are legally responsible for the organization. These people must make estimations about the objective conditions of the market, the political order, the legal order, and innumerable other conditions that face the organization. The interplay between subjective evaluation and objective conditions is more complex in an organization than it is with respect to one individual. There are competing scales of value by members of organizations. These must be reconciled by decision-makers. This is an aspect of plan reconciliation.
A strict defender of methodological individualism insists that it is impossible to make interpersonal comparisons of subjective utilities. Therefore, it is not possible to speak scientifically to issues of plan reconciliation on behalf of a group. But there are very few economists who have consistently defended such a position. I cannot think of any economist who has written this. When it comes time to recommend policies, economists speak authoritatively regarding the right approach to solving problems. They get paid to make such recommendations.
Christians should know that God is capable of making interpersonal comparisons of subjective utility. Jesus did this. “Jesus looked up and saw the rich men who were putting their gifts into the treasury. He saw a certain poor widow putting in two mites. So he said, ‘Truly I say to you, this poor widow put in more than all of them. All of these gave gifts out of their abundance. But this widow, out of her poverty, put in all she had to live on’” (Luke 21:1–4). Jesus had this ability; therefore, individuals have this ability. If they did not, it would be impossible for economists or anybody else to make objective policy recommendations that would have a likelihood of producing positive predictable results, both objective and subjective. I have written about this in Chapter 5 of my economic commentary on Genesis, Sovereignty and Dominion (2012). I first wrote about it in Chapter 4 of the original edition of this commentary: The Dominion covenant: Genesis (1982). This has been a continuing theme in my writings on Christian economics.
Organizations allocate money and time. They are more skilled at allocating time and money than individuals are. They hire specialists to do this. Organizations have detailed sequential timelines. They have specific deadlines to meet. They have procedures that allow specialists to monitor people’s performance over time. If organizations did not have these specialized monitoring units, they would not remain competitive in the marketplace. They would be replaced by more efficient organizations. If an organization spends more money than it takes in, it will be forced to borrow money or raise capital to stay in business. Alternatively, it will be forced to cut spending drastically. Therefore, corporate entrepreneurs must take greater care in forecasting future market conditions than individuals do. Consumers can rely on corporate entrepreneurs to predict what things they will want to buy in the future. They can safely defer this planning process to profit-seeking businesses. This is because of the division of intellectual labor. Businesses deal with the law of large numbers. Decision-makers know more about what consumers will want than the consumers themselves do. Businesses specialize in what consumers in general want. Consumers do not.
5. Collective Spending
Organizations must spend money constantly in order to remain in business. The budgetary structure of business is much more rigorous and detailed than the budgetary structure of the vast majority of individuals. Specialized accountants collect and collate price data. They report price data in specific formats to decision-makers. Ever since the fifteenth century, profit-seeking businesses in the West have been governed by double-entry bookkeeping, which is one of the great developments of the Western world.
Spending is objective. It allocates resources in terms of an existing plan of action. Businesses focus on future consumer demand and future competition from rivals. They purchase land, labor, and capital. These decisions are based on estimations of people’s future spending: customers and competitors. While these future purchases will be based on the individuals’ subjective imputation of economic value, businesses and other organizations concentrate on objective prices. They do so because these objective prices are the outcome of a process of competitive objective bidding. The objectivity of the monetary bids provides accurate information to individual consumers and also decision-makers in organizations. Prices are objective. Spending is objective.
It becomes difficult for large, complex organizations to price the factors of production within the organization. There is no system of competitive price bidding within an organization. There is no auction process. Organizations must therefore rely on market prices generated outside the organizations. If it were not for markets, and especially capital markets, organizations would remain small and local. This is because the information within any organization is less objective than what the market provides. There is far greater subjectivity regarding wages within an organization than between organizations. There is an active labor market that allocates labor in terms of objective wages. Nothing comparable to this exists inside any large organization. This is why profit-seeking businesses sometimes find it profitable to spin off a subdivision as a separate company. Then the senior decision-makers in the original organization can decide whether to purchase particular services or products from independent suppliers. Senior managers need accurate information regarding wages, and this is available only through the auction process known as the labor market.
Inside the organization, a manager makes subjective imputations about the productivity of specific employees under his jurisdiction. This kind of information is vital for profitable operations inside any organization. But this is not the only kind of valuable information. Decision-makers also need objective prices in order to bring a degree of market-based objectivity into the subjective process of evaluating individual performances within the organization. There is a constant trade-off between the desire to obtain accurate subjective knowledge about the organization’s costs of operations vs. the desire to obtain accurate objective knowledge about the costs of operation. The latter form of knowledge is best obtained through a system of competitive pricing in an open market that is outside the legal boundaries of the organization.
This lack of objective prices inside an organization is the reason why there can never be one gigantic cartel in a free market. Rothbard explained why in his chapter on “Monopoly and Competition” in Man, Economy, and State. “In order to calculate the profits and losses of each branch, a firm must be able to refer its internal operations to external markets for each of the various factors and intermediate products. When any of these external markets disappears, because all are absorbed within the province of a single firm, calculability disappears, and there is no way for the firm rationally to allocate factors to that specific area. The more these limits are encroached upon, the greater and greater will be the sphere of irrationality, and the more difficult it will be to avoid losses. One big cartel would not be able rationally to allocate producers’ goods at all and hence could not avoid severe losses. Consequently, it could never really be established, and, if tried, would quickly break asunder” (10:2:F).
The trade-off between subjective imputation and objective pricing keeps profit-seeking businesses under market-imposed restraints. No large company could survive if it relied exclusively on managers’ subjective imputations of the economic value of its internal operations.
There are many limits in life. Knowledge is the most important limit. Someone who has accurate knowledge of the future can be a successful entrepreneur or become a partner with a successful entrepreneur. Anytime that an individual possesses specialized knowledge that consumers would like to benefit from, he is in a position to become an entrepreneur.
Entrepreneurship is a topic virtually ignored by what is known as neoclassical economics. Neoclassical economics operates in terms of a model of equilibrium. The equilibrium model assumes perfect foreknowledge. It assumes the omniscience of mankind. It is therefore an utterly useless model for understanding people's allocation of resources. This is why the Austrian school of economics is superior to neoclassical economics. The Austrian school has always focused carefully on the uncertainty of decision-making. In this, it follows the creative work of an economist whose name became associated with the Chicago school of economics, Frank H. Knight. His book was the first major exploration of uncertainty and entrepreneurship. Its title was Risk, Uncertainty, and Profit. It was published in 1921. Ludwig von Mises adopted this analysis in Human Action. He footnoted Knight’s book in his discussion of entrepreneurship (XV:8, note 18)
Both Knight and Mises made the distinction between risk and profit. Risk can be analyzed mathematically. It is an aspect of the law of large numbers. It is the basis of all insurance contracts. People can hedge against unwanted outcomes in their lives of what are unpredictable events. Because insurance companies sell policies across large numbers of people in large geographical areas, they can make estimates about the statistical likelihood of specific events. Individuals acting alone cannot do this. Insurance is one of the great inventions in the history of man.
In contrast to risk is uncertainty. Here, there are no mathematical formulas. Individual entrepreneurs make forecasts about the future. Then they make plans to meet what they think will be future events. Then they must implement these plans by allocating assets which are used to purchase land, raw materials, capital goods, labor, and information. If they are successful in their forecasts, their planning, and their allocation of money, they will make profits. Consumers will buy the output of their ventures at prices that the forecasters believed consumers would pay. They bought low, and they sold high. But there are many entrepreneurs who buy high and sell low. Their forecasts are inaccurate. Their plans are not consistent with their forecasts. Unexpected events disrupt their plans. They may be inefficient in allocating resources to implement their plans. For any number of reasons, their plans go awry. They produce losses.
All of this is part of the resource allocation process. The possession of resources inevitably conveys responsibility for the profitable administration of these resources. There is no escape from entrepreneurship. The fearful steward in the parables of the talents and the minas was not psychologically or morally equipped to be an entrepreneur. He could have been an investor who put the money with money-lenders. That would have enabled him to take advantage of the law of large numbers. Bankers are in the business of converting uncertainty into risk. But the steward did not do that, either. He produced a loss for the owner of the asset. The owner therefore brought negative sanctions against him.
Unless somebody is spending money for immediate consumption, he is allocating money for the future. He may simply be setting aside money for future consumption, but he may also be investing money so that he will have more money in the future than he has at present. This was what the capitalist in the parables of the talents and the minas did. He transferred money to stewards. They were to act on his behalf in order to generate greater wealth when he returned. He was future-oriented.
In allocating resources for the future, each person must deal with the fact that he is responsible for the allocation of his wealth before God. He may not consider this, but he should. In any case, he is responsible in the present in a significant way compared with his responsibility in the future. He may die between now and then. Circumstances may change dramatically. So, wealth owned in the present is worth more than the same numerical wealth in the future. In allocating capital for the future, we discount the value of the expected goods in the future. They may be the same goods physically and numerically, but the value of the goods is greater in the present than the expected future value of the goods.
This is why the man in the parables of the talents and the minas was upset with the steward who buried the coin. The man told the steward he should have given it to the money-lenders. They at least would have returned a rate of interest to the steward who was acting on behalf of the owner. To return the coin to the owner was not good enough to satisfy the owner. He could have kept the coin for himself during his absence. He did not need a lazy or resentful steward to act on his behalf economically if all the steward was going to do was bury the coin. That took no skill. That took no estimation of the rate of return on the investment. The parables made it clear that the return of exactly what had been given to the steward was reprehensible performance. The steward was severely punished for his lack of entrepreneurship. He was a terrible steward. Yet he had not lost the coin. The conclusion is inescapable: when the businessman went on his journey, the present value of the coin was greater to him at that time than the return of the same coin in the future. That coin was worth less. The owner discounted the economic value of the coin returned to him in the future. It was the same coin physically, but it was not the same value economically to him. It was worth less. He deserved a positive rate of return to compensate him for the discount that he legitimately applied to the future value of the coin at the time when he went on his journey.
Therefore, allocation has to do with subjective economic value, not simply physical capital. To treat present capital identically with future capital is bad economics. It does not take into account the discount that the decision-maker applies in the present to the future value of an asset.
The allocation of resources is inescapable. Individuals and representative agents in institutions must decide what to do with the assets they legally control. These assets have objective prices because of the market’s auction process. Consumers are constantly bidding for the output of land (raw materials), labor, and capital. Their bidding produces objective prices.
People allocate resources in terms of their hierarchy of priorities, which is subjectively determined, i.e., imputed. People are limited by the objective resources that they control and the objective circumstances that they face: money, prices, knowledge, time, and geography. To purchase an asset or an opportunity, they must surrender ownership or control over something of value in the free market. They exchange one set of circumstances for another. There is no escape from this process of matching subjective imputation to objective conditions. This is what the dominion covenant is all about: the responsibility of resource allocation. This is an inescapable implication of the biblical doctrine of stewardship. The cosmic Owner has allocated His resources to His stewards. He holds them responsible for the administration of His assets. This is an aspect of common grace. Grace precedes law. But law soon follows. So do objective responsibility, objective allocation, and objective judgment: profit or loss.
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