Updated: 3/3/20
So the men turned from there, and went toward Sodom, but Abraham remained standing before the Lord. Then Abraham approached and said, “Will you sweep away the righteous with the wicked? Perhaps there are fifty righteous within the city. Will you sweep it away and not spare the place for the sake of the fifty righteous that are there?” Far be it from you to do such a thing, killing the righteous with the wicked, so that the righteous should be treated the same as the wicked. Far be it from you! Will not the Judge of all the earth do what is just?” The Lord said, “If I find in Sodom fifty righteous within the city, then I will spare the whole place for their sake.” Abraham answered and said, “Look, I have undertaken to speak to my Lord, even though I am only dust and ashes! What if there are five less than fifty righteous? Will you destroy the whole city for lack of five?” Then he said, “I will not destroy it, if I find there forty-five" (Genesis 18:22–28).
Thus began the Bible’s most famous story about negotiating. Abraham was negotiating with God. Why did he have both the courage and the effrontery to do this? Because he had just entered into a covenant with God (Genesis 17), he believed that God was willing to negotiate with him. He was correct.
1. Abraham’s Other Negotiations
This is the most detailed account in the Bible regarding the process of negotiating the price of an exchange. But this was not the first time that Abraham negotiated. After his rescue of his nephew Lot from the invading king Chedorlaomer, he was offered a reward by the king of Sodom, one of four regional kings whose subjects and goods had been stolen by Chedorlaomer. Abram had also liberated them. “The king of Sodom said to Abram, ‘Give me the people, and take the goods for yourself.’ Abram said to the king of Sodom, ‘I have lifted up my hand to the Lord, God Most High, Creator of heaven and earth, that I will not take a thread, a sandal strap, or anything that is yours, so that you can never say, “I have made Abram rich.” I will take nothing except what the young men have eaten and the share of the men that went with me. Let Aner, Eshkol, and Mamre take their portion” (Genesis 14:21–24). This verbal exchange took place immediately after Abram had tithed 10% to Melchizedek, priest of Salam. Abram gave a tithe to him, for Melchizedek was God’s covenantal agent, but he took nothing from the king of Sodom.
Abram wanted to uphold God’s sovereignty. That was his supreme goal. God had called him out of Ur. He had obeyed God’s call. So, after Lot’s rescue, Abram gave all credit to God, including his tithe on the spoils of wars. For this reason, he refused to accept a gift from the king of Sodom. He chose to be in debt to no man, either economically or symbolically. He maintained this attitude four decades later, when he negotiated with Ephron, a landowner in Canaan, for the purchase of a field for burying his wife. Ephron offered to give the field to Abraham. Abraham refused. Instead, he paid a high price. “Abraham listened to Ephron and Abraham weighed out to Ephron the amount of silver that he had spoken in the hearing of the sons of Heth, four hundred shekels of silver, according to the standard measurement of the merchants” (Genesis 23:16). He did not negotiate for a lower price. He paid the price that Ephron had said the field was worth (v. 15).
His behavior was contrary to the analytic presupposition made by economists: people prefer more. Another way of saying this is this: everyone wants to pay the lowest price. But this universal assumption has an unstated qualification: “other things being constant.” Abraham saw clearly that there were invisible strings attached to the gifts: an implicit declaration about the hierarchy of authority. He who gives away a scarce resource is higher on the chain of authority than the recipient. Abraham would not surrender his high position as a representative of God.
In contrast, he tithed to Melchizedek, even though Melchizedek did not ask him to. On the contrary, Melchizedek first gave Abraham a meal. “Melchizedek, king of Salem, brought out bread and wine. He was priest of God Most High. He blessed him saying, ‘Blessed be Abram by God Most High, Creator of heaven and earth. Blessed be God Most High, who has given your enemies into your hand.’ Then Abram gave him a tenth of everything” (Genesis 14:18–20). Abram fully understood that Melchizedek was higher on God’s chain of command than he was. Melchizedek was a priest who offered a meal of bread and wine. (That is the New Testament church’s communion meal.) The epistle to the Hebrews declares that Melchizedek’s priesthood was superior to Levi’s (Hebrews 7). Abraham paid tithes to him, and this acknowledged his subordination (Hebrews 2:17–3:1). [North, Epistles, ch. 21]
2. Negotiating With God
With this as background, you can better understand the economics of Abraham’s negotiation with God. He was negotiating about the destruction of Sodom. Three men had approached him immediately after the covenant ratification of circumcision. They told Abraham that his wife would conceive and produce a son. Abraham was age 99. This seemed impossible to his 89-year-old wife, who laughed (Genesis 17:17). Little did the couple know that, 38 years later, after she died at age 127 (Genesis 23:1), Abraham would depart from Isaac’s land, remarry, and produce six more children (Genesis 25:1–2).
The three men were on a mission. They were headed toward Sodom. With no introduction, the text then says that God told Abraham what the mission was. God was going to Sodom to see if the sin of the city was as bad as the reports indicated. He implied that if His investigation confirmed the reports, He would destroy the city (v. 21). In chapter 19, we are told: “The two angels came to Sodom in the evening, while Lot was sitting at the gate of Sodom. Lot saw them, arose to meet them, and bowed down with his face to the ground” (v. 1). They were messengers of judgment, as the text soon reveals. The narrative implies that two of the men who had met with him had been angels. Then who was the third man? Presumably, it was God, who was appearing as a theophany. He visibly was a man. This was the Person Abraham began to bargain with. Abraham kept pressing God to lower the number of men required for Him to spare the city. They eventually settled on an agreement: ten men (v. 32). “The Lord went on his way as soon as he had finished talking with Abraham, and Abraham returned home” (v. 33).
We are not told what Abraham’s goal was. We know this much. Abraham’s nephew Lot lived in Sodom. When he had first journeyed to Sodom, he was the owner of many animals. This is why he and Abram separated. There was insufficient land for both flocks (Genesis 13:5–11). Lot must have sold his sheep in order to live inside the city. Abraham presumably was haggling with God in order to spare Lot the trouble of having to start over in life. Covenantally, Lot would serve as a judicial covering for the city. God graciously entered into a session of bargaining. He knew that there were only four covenant-keepers in the city: Lot, his wife, and his two daughters, all of whom fled before judgment came. God could easily afford to settle on ten people as the minimum required. This number would not justify sparing the evil city.
Abraham was acting as an unofficial, unpaid trustee for Lot. Abraham persuaded God to spare the city for the sake of 50 righteous people. If there were only 49, then Lot would be forced to move to avoid destruction. Abraham concluded that, as Lot’s trustee, it would be better if he could persuade God to accept a lower price. Maybe God would be willing to do this. Abraham could not read God’s mind. There was always a possibility that God would give Abraham what he was asking for at a lower price. Abraham had the mental outlook of a skilled bargainer. “You never know!” Sure enough, God settled for less. So, Abraham asked for an even lower price. God agreed. The bargaining continued.
Why didn’t Abraham initially ask God for the lowest price that Abraham was willing to accept: five people? Because he was using a strategy that he had probably learned long before: do not insult the person on the other side of the transaction with too low an offer when you first begin the negotiating process. His response might be this: “Do you take me for a fool? I would never accept that low a price.” That would end the negotiation. By adopting an experienced negotiator’s tactic of initially asking for a marginally lower price, Abraham kept the negotiating process going. This took patience. It also took a sense of when to stop. This was all a matter of guesswork for Abraham. But there were positive signals. Because God kept agreeing without making a counter-offer, Abraham assumed that God might accept a lower offer. He was correct. God accepted a final offer that was 20% of Abraham’s original offer. At that point, Abraham ceased negotiating.
This story indicates that there is nothing immoral about negotiating. This story has come down through millennia as a validation of the strategy. If there were something wrong with negotiating, God would not have been a party to a negotiation with an entire city at stake.
Abraham appealed to God’s mercy. “Will you sweep away the righteous with the wicked?” (v. 23). “Far be it from you! Will not the Judge of all the earth do what is just?” (v. 25). This was a declaration of his faith in God as a God of mercy. By appealing to God’s mercy, he was acknowledging the possibility of the city’s future redemption by God. At the same time, if fewer righteous people were found in the city than the lowest number (price), then God’s agreement guaranteed the city’s total destruction. Lot and his family would have to flee with nothing. The flocks were no longer his. His wealth was invested inside the city.
God was in a stronger bargaining position than Abraham. He knew what Abraham was thinking. Abraham did not know what God was thinking. Also, God knew what the moral status of the city was. Nevertheless, He sent angels there to confirm the rumors. He conducted a thorough investigation. Then He brought permanent judgment against the city and all but four of its inhabitants. The city became a model of evil and the consequences of evil. Almost two millennia later, this became a model for God’s judgment on the biological heirs of Abraham. Jesus told the disciples: “Whatever town you enter, and they receive you, eat what is set before you, and heal the sick that are there. Say to them, ‘The kingdom of God has come close to you.'’ Whenever you enter a town and they do not receive you, go out into its streets and say, ‘Even the dust from your town that clings to our feet we wipe off against you! But know this: The kingdom of God has come near.’ I say to you that on the judgment day it will be more tolerable for Sodom than for that town” (Luke 10:8–12).
When the negotiations were over, they separated. “The Lord went on his way as soon as he had finished talking with Abraham, and Abraham returned home” (v. 33). Abraham had just made a contract with God. This was a follow-up to his covenant with God. He already had confidence that God would honor the terms of this contract. He had confidence that God would honor the terms of the covenant. He had such confidence that he circumcised all the males of his household. This public ceremony was a visible testimony of his confidence in God’s words. God had offered him benefits: the inter-generational inheritance of his as-yet unborn heir. This was an answer to his original question: “Abram said, ‘Lord God, what will you give me, since I continue childless, and the heir of my house is Eliezer of Damascus?’ Abram said, ‘Since you have given me no descendant, see, the steward of my house is my heir.’ Then, behold, the word of the Lord came to him, saying, ‘This man will not be your heir; but rather the one who will come from your own body will be your heir’” (Genesis 15:2–4).
In Chapter 2, I discussed the covenant model as it applies to economics. Section F is devoted to economic laws. Here is the third point. It is an economic law: “People prefer more.” I added this qualification: at the same price. This is the foundational law of the individual mental process that economists call economizing. When Americans hear this word, they think “paying less.” Someone who pays less money for what he wants is said to be economical. Being economical means “getting a bargain” or perhaps “driving a hard bargain.” In the era before supermarket checkout lines and online ordering, this sometimes meant bargaining with a seller. This is what Abraham did with God.
1. The Science of Economizing
Economics is the science of economizing. The most common meaning of the word “economize” is this: to reduce expenditures. Someone has made a list of goals. He then seeks ways to minimize his expenditures in obtaining these goals. He devises a plan of action. This process is sometimes described as this: “getting more for less.” An economist regards this description as scientifically imprecise. It has two variables: more and less. The economist would give the decision-maker this choice: either pay less to achieve a fixed goal or else maximize the value of the purchases by means of a fixed budget. Both procedures involve a quest for maximization. Either your goal is fixed or your budget is fixed. Take your pick.
This is the economist’s version of solving the problem of matching ends and means. The ethicist asks this: “Does the end justify the means?” The economist tries to avoid such excursions into ethics. He asks this: “How can someone maximize his utility?” The word “utility” seems morally neutral. It is related to “utilitarian.” Most economists profess a commitment to utilitarianism: the philosophy that an action is right in so far as it promotes happiness. It is not right morally. It is right technically. The economist does not seek to describe this scientifically: “doing the right thing.” He says his conceptual framework can explain how and why people seek to achieve this: “doing the thing right.” By “right,” he means: “at the lowest expenditure of scarce resources.” This is utilitarianism.
Ludwig von Mises was a utilitarian. He offered this explanation early in Human Action.
In this sense we speak of the subjectivism of the general science of human action. It takes the ultimate ends chosen by acting man as data, it is entirely neutral with regard to them, and it refrains from passing any value judgments. The only standard which it applies is whether or not the means chosen are fit for the attainment of the ends aimed at. If Eudaemonism says happiness, if Utilitarianism and economics say utility, we must interpret these terms in a subjectivistic way as that which acting man aims at because it is desirable in his eyes. It is in this formalism that the progress of the modern meaning of Eudaemonism, Hedonism, and Utilitarianism consists as opposed to the older material meaning and the progress of the modern subjectivistic theory of value as opposed to the objectivistic theory of value as expounded by classical political economy. At the same time it is in this subjectivism that the objectivity of our science lies. Because it is subjectivistic and takes the value judgments of acting man as ultimate data not open to any further critical examination, it is itself above all strife of parties and factions, it is indifferent to the conflicts of all schools of dogmatism and ethical doctrines, it is free from valuations and preconceived ideas and judgments, it is universally valid and absolutely and plainly human (I:4).
The free market economist argues that individuals are self-interested. People seek to maximize their income, thereby maximizing their wealth. Their ultimate goal is consumption. Adam Smith spoke for the vast majority of economists when he wrote this: “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it” (Wealth of Nations, IV:VIII).Two comments are in order. First, Smith’s view is anti-Christian. The Christian view of man’s supreme purpose is this: “But seek first his kingdom and his righteousness and all these things will be given to you” (Matthew 6:33). [North, Matthew, ch. 15] A person’s performance is judged by God daily and will be judged finally in terms of this criterion. Second, there is an implicit ethical postulate in Smith’s phrase: “the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.” This leads to two additional questions. First, why favor either the producer or the consumer? Second, who should do the favoring?
2. Consumer Authority
The free market economist W. H. Hutt coined a phrase in the mid-1930's: “consumer sovereignty.” It has been widely adopted by free market economists in the Austrian tradition. At root, it is incorrect. First, sovereignty is a legal concept. It has to do with political power. Hutt knew this. That is what his book was about: Economists and the Public: A Study of Competition and Opinion. But the phrase is not appropriate in economic analysis. From the standpoint of the economic theory of property rights, both the producer and the consumer own property. The civil government must not favor either party in a legal dispute over property. This is the biblical position. “Do not cause judgment to be false. You must not show favoritism to someone because he is poor, and you must not show favoritism to someone because he is important. Instead, judge your neighbor righteously” (Leviticus 19:15). [North, Leviticus, ch. 14] To rewrite Smith’s statement: “the interest of the producer ought not to be attended to, nor should promoting that of the consumer.” Second, there is a legitimate case for the free market as an arrangement that leads to the economic authority of consumers. This case rests on the definition of money offered by Austrian economist Carl Menger in 1892: “money is the most marketable commodity.” Mises adopted this definition in his book, The Theory of Money and Credit (1912).
Economists say that money is liquid. The use of the word “liquid” to describe an aspect of market exchange is another example of the importation of the terms of physics into economics. This always muddies the waters (another verbal importation from physical science), as I explain in Chapter 40. The economist defines liquidity as follows: “An asset that can be used to buy a wide range of economic resources (1) immediately (2) without having to (a) offer a discount or (b) pay money to advertise it.” A liquid asset is an asset that imposes no exchange costs for the person who owns it. By convention and also by analysis, the economist defines “customer” as the party in a market exchange who owns money. Therefore, the customer possesses an advantage: a far wider range of purchasers of his asset (money) compared to the number of purchasers of the asset he is thinking about buying. A seller is far more likely to offer a discount than a buyer is. This is the meaning of consumer authority. The seller implicitly says to the seller: “I own what you want to own. There are lots of sellers who want to sell to me. So, make me a good deal.”
The buyer’s challenge rests on this characteristic feature of the market’s system of competition. Sellers compete against sellers. Buyers compete against buyers. Because the buyer has money, he faces a vast array of sellers who are willing to take his money. Why? Because money is the most marketable commodity. In contrast, most of the time a seller faces relatively few buyers who are willing to make an immediate purchase at the listed sales price. He is pressured by market competition to negotiate.
1. Finitude and Scarcity
Men are finite. The world is finite. There are limits on men and nature that are imposed by the creation. God is not limited. Nevertheless, He deliberately limited Himself during the creation week. He took six days to make the universe. He did not speak the universe into existence out of nothing. He did this only on day one: “Let there be light” (Genesis 1:3b). This was an affirmation of sequence through time. Man is a temporal creature: creation and sequential development. The universe is also temporal: creation and sequential development.
Scarcity is a given condition. Men before the fall could not get all they wanted at zero price. Developing the environment would take knowledge, time, raw materials, and capital. Furthermore, there would be varying rates of economic return. Different people have different skills. Capital would accumulate faster in one family than another. There would be competition. All of this pointed to this inescapable concept: economizing. To attain a higher return on investment, investors would have had to save and invest more wisely than the competition. Competition is a universal aspect of the fulfilment of the dominion covenant, pre-fall and post-fall. What is competition? It is this offer: “I will give you a better deal. Buy from me, not from someone else.”
The buyer may not choose an increase in consumption. The richer that someone is, the less likely that he will allocate most of his income to consumption. There is a trade-off between time and money. The very rich person does not have enough lifetime remaining to consume more than a small fraction of his wealth. So, he must decide who will inherit what: the state (taxes), his children, and his favorite causes. He must choose. He must make estimates about the future use of his wealth. What is the best use? His answer will depend on his long-term goals. But this is certain: he will not consume more than a fraction of his wealth.
So, the more economically successful he is, the more he will resemble Abraham. He will not decide what to buy and what to pay in terms of the free market principle of monetary price competition. He will try to match his highest goals to his capital. He will attempt to link his ends and his means. In the inescapable trade-off between time and money, he will favor the careful allocation of his time. This outlook is biblical. “Look carefully how you live—not as unwise but as wise. Redeem [buy back] the time because the days are evil. Therefore, do not be foolish, but understand what the will of the Lord is” (Ephesians 5:15–17).
He has priorities. These are subject to change. His external conditions change. His subjective tastes change. In order to maximize his rate of return on both time and money, he must match his subjective tastes to his external conditions. He must budget because he cannot attain all of his goals by means of his existing supply of money, knowledge, and time.
2. Behavioral Economics
The academic subdivision of economics known as behavioral economics, which is heavily based on psychology, has developed a theory of framing. Marketers knew about many of these laboratory discoveries long before psychologists and economists began collaborating. How the seller frames the choices can affect the choices. Here is an example from real estate marketing. A landlord charges a lower monthly rent than his competitor. He tells a prospective renter that he will charge the renter a penalty of X amount of money for paying the monthly rent later than day one of each month. This creates resentment in the mind of the renter. “Who does he think he is? What kind of person does he think I am?” If he pays late, he blames the landlord for charging a penalty. “It’s not fair. Accidents happen.” He has an unfavorable view of the arrangement. A competing landlord frames the arrangement this way. He tells a prospective renter: “I will give you a discount of X amount of money if you make payment early: before day two of the month.” The renter thinks: “This is the kind of deal I like. I always pay on time. I can get a discount.” If he pays late, he blames himself for having missed the discount. “It’s fair. Nobody gets rewarded in life for being late.” He has a favorable view of the arrangement. Yet the amount of either the penalty or the discount is the same in both offers. The logic is the same: pay on time or else suffer the consequences. What is different is the framing. Conclusion: the assumption that people are rational and logical when making economic choices is sometimes insufficient to explain their behavior.
Economic theory should also take seriously the issue of changing tastes. Tastes are important aspects of economizing. Economic theory should explain them. But mainstream economists have a major theoretical problem with changing tastes. There is no economic theory that accounts for changing tastes. Such changes do not fit into a logic-based model of economic causation. They surely do not fit into a mathematical model. These changes are unpredictable anomalies from the point of view of economic theory. They are deviations from rationality. They do not fit into a logic-based explanation of universal decision-making. We are back to Kant’s nature/freedom dualism (science/personality dualism).
Priorities are subject to change and also to manipulation, such as framing. The economic theory taught in textbooks screens out such changes in advance by insisting on a qualification: ceteris paribus. This means “other things remaining constant.” Economists insist that their theories apply to the ever-changing real world. Supposedly, their theories make people’s behavior more predictable. But the qualification of “other things remaining constant” can undermine this goal. How? By undermining the central premise of economic theory regarding human behavior: economic self-interest. Remove or qualify the idea of economic self-interest, and the science of economics becomes more like psychology (individual behavior) or sociology (group behavior).
Here is the epistemological problem. It goes back to the conflict between Parmenides and Heraclitus. Parmenides defended logic. Logic is timeless. It is not “true today, false tomorrow.” When an economist asserts “other things remaining constant,” he is listening to the voice of his inner Parmenides. He wants to impose the logic of timelessness onto the realm of change. He wants to trace a single cause to its many effects. He wants to make economic predictions more accurate. Most of all, He wants coherence unifying “if . . . then.” Here is the problem. Things do change. First, do important things change? How can theory deal with important vs. less important or even unimportant changes? Second, how can the economist be sure how long other things will remain constant? To answer this, there would have to be a formula or at least a plausible argument to identify the time limit that is relevant in each case. No formula exists to get the timeless logic of Parmenides to interact coherently and therefore predictably with the change of Heraclitus. It is guesswork. In the language of economic theory, it is intuition. Intuition cannot be defined. This is what makes it intuitive. It is a subjective judgment. I discuss this in detail in Appendix A.
Consider personal self-interest. It takes subjective judgment to assess the limits of economic self-interest in a specific case or types of cases. Economists must apply economic theory to history. There is no formula that enables an economist to do this. This required judgment used to be called casuistry: applying fixed ethical principles to changing conditions and specific historical cases. If an economist deals with changing conditions by defining away change, he risks making his theory irrelevant for analyzing specific cases or types of cases. He dismisses change for the sake of logic or mathematical precision. He makes economic theory increasingly abstract and therefore increasingly useless in explaining why people act in predictable ways. He makes economic theory increasingly irrelevant—all for the sake of logical rigor and precision. This process of abstraction produces this result: “He has sharpened his intellectual tools so precisely that they are useful only for splitting academic hairs.”
3. Conserving Resources
A major goal of most people is to conserve resources most of the time. Nevertheless, there are times of celebration. God mandated such times of celebration for the Israelites. They were required to use money generated from the sale of the tithes on their crops to journey to a central city of worship. “There you will spend the money for whatever you desire: for oxen, or for sheep, or for wine, or for strong drink, or for whatever you desire; you will eat there before the Lord your God, and you will rejoice, you and your household” (Deuteronomy 14:26). To hold back was a sin. Why? Because men are not to place their hopes exclusively in their own wealth. Consuming resources in a central city was to be a public testimony of their faith in this principle of action: “There’s more where that came from.”
Then why conserve resources? Because of the dominion covenant. Men must forego consumption (save) in order to build capital. Capital is a tool of dominion. God commanded Adam and Eve to subdue the earth. This covenant was not rescinded by God after the fall of man. It remains in force.
Conventional economic theory explains the desire to conserve resources in terms of the desire to consume ever-greater resources in the future. This was Adam Smith’s view. But this explanation does not apply well to rich people. They are rich because they saved diligently and invested wisely. Over time, they become ever-less dependent on the personal motivation of greater future consumption as a technique to persuade them to stick with their savings plan. They have other motivations for their high rates of saving. They may want to build a business empire. Or they may want to accumulate wealth for future charitable giving. But they do not save primarily as a way to consume more goods in the future.
4. Marginal Utility
People seek lower prices, other things remaining constant. They seek better deals, other things remaining constant. They do not self-consciously waste resources. This is good economic theory. It is also effective economic practice. In the United States, the triumph of the Sears’ mail order catalogue after 1883, the triumph of Ford’s Model T car after 1908, the triumph of Walmart retail stores after 1962, and the triumph of Amazon’s online buying after 1995 are examples of successful marketing based on price competition. If we think of a product as a bundle of services, we can understand this. People do not want to pay more for a bundle of services than the competition offers. They can buy a second bundle of services if they save money on the first bundle.
The theory of marginal utility was discovered by three economists in the 1870's: Carl Menger, Léon Walras, and William Stanley Jevons. This was a major breakthrough in economic theory. It rapidly replaced the labor theory of value and the cost-of-production theory of value. It described the way that a person selects what to purchase with his money. He has a list of priorities. He allocates his money in terms of this list: first, second, third. He uses his money to satisfy his highest priority before he allocates some of his remaining money to satisfy his second priority. He continues to spend money until he has allocated all of it to satisfy his highest priorities. He sees no way to re-allocate his objective supply of money and goods so that he will be able to attain a higher subjective rate of return from his property. This is the basis of the economic concept of marginal utility. People satisfy their top subjective desire first. Their second subjective desire is less intense. The more money that they receive in income, the lower that each monetary unit’s subjective value is to them, other things (especially tastes) remaining constant. But tastes do change. Income keeps coming. So, people are constantly re-allocating their wealth at the margin. They do this in order to increase their total subjective utility from their property. They increase their total utility by increasing their subjective utility at the margin. They think: “If I make this minor change, I will be better off overall.”
Marginal utility theory applies to individual decision-making. In the way that economists frame the question of marginal utility, it takes place in a timeless setting. When economists discuss declining marginal utility, they do so in the abstract. The abstract is separated from history. This is unrealistic. The theory can be applied effectively in explaining how people re-allocate their wealth, especially as their wealth increases. But, ultimately, it suffers in practice from its abstraction: separation from history.
Here is an example. As people get wealthier, we would assume that they become more charitable. They have satisfied their basic wants, and now they have additional money. They are less at risk for economic setbacks. But this is not what we find. Rich people give away a decreasing percentage of their income during their lifetimes. Because this book is a treatise, I do not like to include geographically dependent and time-dependent statistics. But the following statistics do illustrate my assertion. In 2014 in the United States, median family income was about $54,000 per year. Families with an income below $25,000 donated over 12% of their income to charity. Families whose income was from $25,000–$50,000 donated about 7% of their income. The percentages continued to fall as incomes rose. The lowest percentage was from families with incomes of $200,000–$500,000. Their percentage was 2.6%. The percentages rose above this. In the highest income bracket listed, over $2 million a year, the percentage was 5.6%. This was less than half the percentage that poor families donated. As Americans get richer, their tastes change. Their values change. They become more acquisitive, more mammon-driven. Conclusion: marginal utility analysis is almost useless in explaining charitable giving in the United States. The poor sacrifice at far higher rates, when presumably they can least afford to. The statistics indicates that wealth is addictive. “The more you own, the more intensely you want to own more." It takes a self-conscious effort to avoid this addiction. This helps us to understand Jesus’ parable of the man who wanted to build more barns to store his crops (Luke 12:16–21). [North, Luke, ch. 25]
Marginal utility analysis does not apply well, if at all, to addictions. A person knows that consuming ever-greater quantities of an addictive substance will shorten his life. It will surely reduce his wealth. Overall, he will be worse off. Rationally, he knows this, but he still chooses to indulge his addiction at the margin. He tells himself: “I can quit at any time.” He constantly chooses not to quit. With addiction, an increase in subjective utility at the margin is a threat to the objective basis of total subjective utility. Dead people lose total utility. If he does not stop, he may die. He knows this rationally, but he does not stop. He makes choices at the margin that reduce his power of choice in the future. He steadily loses his ability to stop. A discontinuous event, which is not predictable, may enable him to stop. Members of Alcoholics Anonymous call such an event “hitting rock bottom.” It is not a universal phenomenon. It is not predictable in specific alcoholics’ lives. But it happens.
Any economic textbook or treatise that does not incorporate addictive behavior into its theory of human action is incomplete. The economic behavior of an addict is different from that of a non-addict. His behavior is more predictable as his power of choice decreases. He has little ability to allocate his money to anything else. It is easier for an economist to explain an addict’s behavior than a normal person’s behavior. An addict spends an increasing percentage of his budget on his addiction. The marginal utility of addictive short-term consumption increases. Each expenditure on the addictive substance has the effect of increasing future demand for that substance. There is no declining marginal utility from each expenditure. There is increasing marginal utility. Each additional unit of consumption re-structures the addict’s priorities. His subjective utility derived from other goods and services declines. This condition is a curse. Economists should label it as a curse. But that would point to a logical conclusion: economic theory is not value-free. Economists prefer to avoid drawing this conclusion at the margin. To do so would reduce their total subjective utility. They understand this axiom of human action: “You can’t change just one thing.” This axiom has a corollary: “You can’t change your mind about just one thing.” They also understand the law of unintended consequences. They act as though they believe that it is in their personal self-interest not to revise marginal utility theory to accommodate addiction. Perhaps they fear that such revising could become addictive.
People prefer more at the same price. Owning more increases their range of opportunities. This is a good definition of increasing wealth: “more opportunities at the same price.” If they save money on purchasing an item they want to own, they will have money left over to buy something else. This is a universally acknowledged advantage. If they want to give away whatever money is left over, they can do this.
More wealth imparts greater responsibility. This is inescapable in God’s covenantal world. Owners allocate wealth. The decision to spend money is a decision to spend God’s money. Men are God’s economic stewards. He holds them accountable, as we learn in the parable of the talents (Matthew 25:14–30). [North, Matthew, ch. 47] The dominion covenant was designed to persuade people to take on greater responsibility. This is what dominion requires. People have what could be called a default setting to take on greater responsibility. The two main incentives are the desire for wealth and the desire for sex. The private property system is the God-designed institutional arrangement for people to pursue wealth. The family is the God-designed institutional arrangement for people to pursue sex. Both institutional arrangements benefit productive individuals. Both institutional arrangements benefit society. There is a God-designed correlation between the pursuit of individual self-interest and service to society.
The customer’s desire to get a lower price from the seller is as universal as the sexual impulse. So is the seller’s desire to get a higher price from the customer. Customers compete against customers. Sellers compete against sellers. Out of this competition comes an increasing quantity of goods and services. This is an aspect of the extension of the dominion covenant. Some people pursue the kingdom of God. Others pursue the kingdom of mammon. They have this in common: the desire for a better deal. To get this, they need money. So, they economize.
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