Chapter 22: Competition
Updated: 4/13/20
Now there were six stone water pots there used for the Jewish ceremonial washing, each containing two to three metretes. Jesus said to them, “Fill the water pots with water.” So they filled them up to the brim. Then he told the servants, “Take some out now and take it to the head waiter.” So they did. The head waiter tasted the water that had become wine, but he did not know where it came from (but the servants who had drawn the water knew). Then he called the bridegroom and said to him, “Every man serves the good wine first and then the cheaper wine when they are drunk. But you have kept the good wine until now” (John 2:6–9).
This was the first of Jesus’ miracles (v. 10). Jesus supplied the bridegroom with the highest quality wine that was available. The bridegroom had not purchased enough wine. He was about to be embarrassed at his own wedding. Jesus saved him from this embarrassment. Everyone who attended the wedding feast was treated with high-quality wine. Amazingly, they received this late in the feast.
It is clear from the comment of the waiter what the prevailing practice was in the region. The organizers of a feast would serve the good wine first, when everybody was alert to the taste. But, as the evening progressed, and people’s taste buds became less discriminating as the effects of the wine took over, they would serve wine of lesser quality. This certainly was a rational response to the effects of the wine. It seems wasteful to supply the best wine at the end of the wedding, when the attendees would not perceive the superior quality of the wine. But Jesus was not under economic constraints. Since He could make wine out of water, why not make the best wine? If you are going to perform a miracle, perform a spectacular one. In this case, spectacular meant supplying the best wine at the end of the feast.
Jesus could have gone into the wine-making business. This would have been a waste of His talents. But if He had done so, He would have been a formidable competitor. How could any other winemaker in the region or anywhere else have competed with someone who could supply the best-quality wine for the price of water? From the point of view of the competing winemakers, this would have been unfair competition. They would have been correct. It would have been unfair. Jesus would have been relying on miracles to supply the local market. This would have been the equivalent of turning stones into bread (Matthew 4:3–4). [North, , ch. 1] But it was a one-time event. No doubt local winemakers breathed a sigh of relief when they realized that it was a one-time event. I have no doubt that word would have spread about the miracle within the local winemakers' association.
Would it have been unfair competition for a local wine seller to enter the market and sell high-quality wine at a below-market price? The answer is no. Local wine sellers might have complained about this unfair competition, but from the point of view of consumers in the region, the newcomer would have been welcomed with open arms and open purses. From the point of view of the buyers, this new competition would have been a tremendous advance in cooperation between the seller and local buyers. From their point of view, there would have been nothing wrong with this new competition. It would have been a benefit.
Competition in a free market is based on the distribution principle of an auction: high bid wins. People who wish to secure ownership of a particular scarce economic resource bid against each other. The auctioneer, who acts as both the legal and economic agent of the seller, awards ownership to the person who makes the highest bid and who then fulfills his promise by transferring money to the auctioneer. The auction is possible only because (1) all of the parties agree to this rule in advance and (2) no one challenges the outcome through the threat of violence, either private or judicial: invoking the state. The allocation of ownership is based on the principle that the person who offers the most money has a moral and legal right to secure ownership of any asset.
There is a subordinate rule that reinforces the principle of high bid wins. The auctioneer is not allowed to hire people to make false bids in order to drive up the price of specific items. This is fraudulent. Such false bidders are called shills. The presence of shills undermines the integrity of the auction. A society may or may not have civil laws against this practice. Even if this is not declared illegal, if word gets out to participants that the auctioneer has adopted such a ruse, people will cease attending his auctions. They will seek out auctions operated by rival auctioneers. The corrupt auctioneer will suffer losses.
The auction process is the moral, legal, and institutional foundation of the market process. The free market is a gigantic auction. This is the best way to understand the free market. This is conceptually simple. You are less likely to make conceptual errors if you always begin your economic analysis with your understanding of how an auction functions. Begin with something simple. Then move to the complex. I developed this auction-based approach to economic theory in Christian Economics: Teacher’s Edition, Part 1.
An auction is an institutional development of the principle of ownership. The right of ownership implies the right of disownership. This in turn implies the right of exchange. By “right,” I mean legal protection from interference by third parties in the use of other people’s property. This is a moral right. It should be a legal right. The clearest statement in the New Testament of this right is found in Jesus’ parable of the field owner and the hired hands. The field owner hires laborers all day long. At the end of the work day, he pays them what they had agreed to. He pays them the same wage. The workers who had begun work early then complain. They had worked longer. They therefore deserved more pay. The field owner’s answer is straightforward. “But he replied to one of them, ‘Friend, I am doing you no wrong. Did you not agree with me for a denarius? Take what belongs to you and go. I choose to give to this last worker as I give to you. Am I not allowed to do what I choose with what belongs to me? Or do you begrudge my generosity?’” (Matthew 20:13–15).
Let us examine this passage in terms of the auction process. Early in the day, the field owner bid for the labor services of several men. They were not legally obligated to accept his offer. As sellers of labor, they had the right to wait for a higher bid. But there was uncertainty involved in this rejection. There might not be a higher bid. Because labor cannot be stored up, they would be risking the loss of money by rejecting the offer. This might be the highest bid of the day. They would return home empty-handed or at least with less money to show for their efforts. They accepted his offer. This was a binding contract. He had to pay. They had to accept this pay. Payment would close the transaction.
At the end of the day, they learned that they might have received the same pay for less work, assuming that the field owner had made them the same offer that he made to other laborers. They complained that they had in some way been defrauded. They implicitly held to the labor theory of value: more work produces greater objective value. In contrast, the field owner implicitly defended the theory of subjectively imputed value. Early in the day, they had imputed more value to the promised money than they imputed to refusing the offer. Their imputation had changed retroactively. This retroactive imputation did not entitle them to a higher wage. He invoked the right of contract, which is an extension of the right of ownership. He did more than invoke it. He accused them of ingratitude. He asked a rhetorical question. “Do you begrudge my generosity?” Of course they did.
He had offered the highest bid they had received at the beginning of the day. We legitimately conclude that it was the highest bid by the fact that they accepted it. If there had been a higher bid for the same labor services, they would have rejected the lower bid. People prefer more to less. This is a law of human action.
All systems of economic policy that justify the state’s interference in the free market’s pricing process are in some way applications of the field workers’ complaints against the field owner. Had the field workers then called in the civil government to compel the field owner to pay them more than they had accepted voluntarily, they would have moved from ingratitude to attempted theft. Any civil government that has such wage control laws on the books is engaging in theft. It is interfering with the right of workers and employers to come to mutually acceptable agreements regarding payment. The field owner is the loser. But there are unseen losers: prospective workers who are willing to work for less, but who are not given the opportunity. The politicians have made such contracts illegal. These workers are now unemployed.
This analysis of labor contracts applies equally well to all contracts. When the state sets the terms of trade, it thereby violates the biblical principle of private property that Jesus used in His parable. We can and should take this principle beyond the realm of current exchange. The parable was based on the fact that the early morning workers made a retroactive claim on the field owner. They wanted the terms of exchange changed after the fact. They wanted out of their half of the contract. We see the same motivation in all programs of compulsory wealth redistribution by the state. Certain voting blocs pressure politicians to transfer wealth that was gained through voluntary exchange. They insist that economically successful businessmen should pay a higher rate of taxation than members of these favored voting blocs. The state then collects this money from businessmen and high-income workers, and it transfers a portion of this money to members of these favored voting blocs. This is done in the name of fairness. This was the same argument that was used by the early morning workers against the field owner. There is nothing fair about the claim. There is surely nothing fair about the politics of the welfare state.
Businessmen and rich people can also pressure politicians to set up favorable tax rates for them. Laws are written that protect large businesses from competition. This reduction of competition harms market participants who never hear superior offers—higher bids—from excluded businesses. This is a misuse of the monopolistic power of civil government. It violates the biblical principle of the impartiality of the law. “You shall do no injustice in court. You shall not be partial to the poor or defer to the great, but in righteousness shall you judge your neighbor” (Leviticus 19:15). [North, Leviticus, ch. 14]
Participants in an auction understand the moral legitimacy of the principle of high bid wins. They also understand that without this principle, some other method would have to be used to settle the question of who gets what, which is the question of who will be allowed to use his property in ways he sees fit. They understand that these other ways would be detrimental to them as participants in the auction. It would reduce the number of auctions. It would therefore reduce the number of opportunities that participants have of buying goods. It would also reduce their opportunities as future sellers to have potential buyers competing against each other to buy whatever they want to sell.
The problem is this: people who understand and accept both the moral legitimacy and the economic opportunities offered by “high bid wins” do not extend their understanding of the auction process to the market process. What they both understand and approve of in the case of a local auction they doubt in the case of the broader market, which is in fact a huge auction. Both auction processes rest on the moral legitimacy of private ownership. Both of them also rest on their efficiency in letting people compete for ownership based on a single principle: high bid wins. What they do not question retroactively at the end of the day with respect to a local auction, namely, that the highest bidders go home with the items offered for sale, they question retroactively with respect to the highest bidders in labor markets, consumer markets, and capital markets. They call for legislation that interferes with the outcomes of these larger auctions.
When sellers compete against sellers for money offered by buyers, it may appear that there is no harmony of interests. The same is true of buyers who compete against buyers. Yet there is a harmony of interests among people who seek to defend a system of private ownership. Such a system allows exchange: disownership. This allows all people to specialize. This enables them to increase their wealth by increasing their output. To use the metaphor of an auction, buyers do not have a harmony of interests when they bid against each other for some item. But they do have a harmony of interests in seeing to it that the auction is conducted honestly. They understand that there will be other auctions if this one proves profitable to sellers, buyers, and the auctioneer, who represents both groups.
It is a mistake to regard the auction's system of competitive bidding as evidence of a disharmony of interest. It would make as much sense to regard two sports teams as having a disharmony of interests because members of both teams seek to defeat the other team. The game is a zero-sum game. The winners profit at the expense of the losers. But all of the participants enjoy the game, which is governed by rules. They have a harmony of interests. They would not like to see a cessation of the games in general.
Ludwig von Mises was on target when he wrote in Human Action:
What makes friendly relations between human beings possible is the higher productivity of the division of labor. It removes the natural conflict of interests. For where there is division of labor, there is no longer question of the distribution of a supply not capable of enlargement. Thanks to the higher productivity of labor performed under the division of tasks, the supply of goods multiplies. A preeminent common interest, the preservation and further intensification of social cooperation, becomes paramount and obliterates all essential collisions. Catallactic [market] competition is substituted for biological competition. It makes for harmony of the interests of all members of society. The very condition from which the irreconcilable conflicts of biological competition arise—viz., the fact that all people by and large strive after the same things—is transformed into a factor making for harmony of interests. Because many people or even all people want bread, clothes, shoes, and cars, large-scale production of these goods becomes feasible and reduces the costs of production to such an extent that they are accessible at low prices. The fact that my fellow man wants to acquire shoes as I do, does not make it harder for me to get shoes, but easier. What enhances the price of shoes is the fact that nature does not provide a more ample supply of leather and other raw materials required, and that one must submit to the disutility of labor in order to transform these raw materials into shoes. The catallactic competition of those who, like me, are eager to have shoes makes shoes cheaper, not more expensive (XXIV:3).
Mises’ disciple, Wilhelm Röpke, wrote this in his book, The Economics of the Free Society ([1937] 1963). He was responding to attacks on the free market’s system of competition.
Such attacks conveniently ignore the fact that it is the liberal economic philosophy which recognizes the latent disharmony between consumer and producer and which sees in competition the means of mitigating this disharmony and thus of safeguarding consumers’ interests. Piquantly enough, the enemies of competition answer this argument by saying that it was liberalism, after all, which developed the doctrine of the harmony of economic interests. Thus we find the real advocates of disharmony engaging with high glee in the task of obstructing those who seek to mitigate the evil by ridiculing them as naive adherents of outworn doctrines of “harmony.” But our economic system can remain viable only if this disharmony is redressed by effective and continuous competition (p. 69).
As I wrote in Chapter 10 of my economic commentary on Genesis, Sovereignty and Dominion (2012):
There is a disharmony of interests apart from the mediating influence of the competitive free market, he concluded. Beware of those seeking monopolistic power. But the easiest way to achieve monopoly, he knew, is to gain the assistance of the civil government. If you wish to release the underlying disharmony of interests, he said, all you need to do is unleash the monopolistic powers of the civil government. What he described as the enemy of the harmony of interests—the enemy of a market-produced, competition-produced harmony of interests—is precisely the statist system that has been constructed by those who ridicule the market’s form of competition and the idea of a competition-produced harmony of interests (Section E).
Critics of the free market say that the market is wasteful. It is wasteful because there are so many competitors in a particular market. Why should they compete against each other? Wouldn’t it be wiser to have a central planning agency allocate everything associated with wine production to local producers? Then the planners could assign a low price for buyers. Under these circumstances, there supposedly would be no waste. The problem is this: no one knows everything that needs to be known about producing better wine at a lower price. Central planners surely do not know. Competition is a discovery process. This was the insight of F. A. Hayek in 1968. The article was translated into English and published in 2002: “Competition As a Discovery Procedure.”
From the days of Adam Smith until today, critics of the free market have argued that some, much, or all of the social arrangement of voluntary exchange is immoral. In most cases, the critics claimed that if the profit motive were restricted, and if private ownership were restricted or even eliminated, the world would get richer. Nature supposedly is a cornucopia that is blocked by private property. But with the collapse of the Soviet Union on December 25, 1991, the few remaining socialists have claimed that socialism is moral, although not as efficient as the market. Max Weber argued in 1920 that this conflict between the claim of greater morality by the socialists and the claim of greater efficiency by the free market economists is inherently unresolvable. He was incorrect. It is solvable on a biblical basis. This book provides the foundation of how it can be solved.
1. Hostility to Competition
One familiar critique of the free market is this: it is competitive rather than cooperative. Socialists insist that competition pits buyers against sellers, employers against workers. If it were not for private ownership, they claim, cooperation would replace competition. This would lead to a more moral, more peaceful, less antagonistic society. In response, defenders of the free market argue that competition is a form of cooperation. This form of cooperation has the advantage of being more efficient and therefore more productive than cooperation based on government ownership of property coupled with good intentions. This argument has not persuaded critics of the market.
First, biblically speaking, we know that any call for the abolition of private property is a challenge to the Bible’s affirmation of the legitimacy of private property, most notably the commandment against theft (Exodus 20:15). [North, Exodus, ch. 28] Jesus was clear about the legitimacy of private property in His parable of the field owner and the hired hands. Some of the workers complained about the pay scale, which was the same for workers who worked varying amounts of time during the day. They asked for more money than they had agreed to. The field owner replied: “Am I not allowed to do what I choose with what belongs to me?” (Matthew 20:15a). [North, Matthew, ch. 40] So, from the beginning, we can be sure that the critique of market competition is not based on the moral high ground. It is based on the moral low ground.
Second, the argument against competition is an argument against voluntary exchange. It calls into question the moral legitimacy of someone who seeks an exchange of something he owns for something he does not own. In fact, it calls into question the ethics of two people who seek such an exchange. It implies that voluntary exchange is somehow tainted morally. Yet the heart of such an exchange is the desire to increase cooperation. Each of the parties to the transaction is making this offer: “If you give me what I want, I will give you what you want. We will both be better off after this exchange of ownership.” They would not complete this transaction if either of them did not believe this mutual assurance.
Third, the argument fails to understand the nature of competition. It rests on an unstated assumption: sellers compete against buyers. It also rests on a second assumption: sellers are in a superior position to buyers. They can therefore make greater profits by exploiting buyers. They do not define the word “exploit” in terms of any economic theory. Both of these assumptions are incorrect in most cases.
2. “Sellers Compete Against Buyers”
Let us consider the first assumption, namely, that sellers compete against buyers. Sellers of goods and services prefer that buyers pay more. Buyers of goods and services prefer that sellers ask for less. Their motives are the same: self-interest. The questions that I have for those who argue this way are these. First, what keeps sellers from increasing their prices? The answer is this: other sellers who threaten to undercut any seller who raises his price. Second, what keeps buyers from insisting on discounts as a condition of making a purchase? The answer is this: other buyers will buy all of the output of the sellers at the retail price. Sellers cannot get what they want because of rival sellers. Conclusion: sellers compete against sellers. Buyers cannot get what they want because of rival buyers. Conclusion: buyers compete against buyers.
There are cases in which there are few competing sellers. An example would be an oasis. There are also cases in which there are few competing buyers. An example would be an imminent hurricane. Sellers of automobiles may have to offer discounts if they do not want their inventory damaged or blown away. They prefer to transfer ownership to a buyer.
There are cases of face-to-face negotiators who do not know what the other party will accept. A seller does not know how much money a specific buyer will pay. A buyer does not know how much a specific seller will accept. There is no developed local market for this particular asset. There is no widely known price. This situation applies to real estate and used goods: “one of a kind.” It applies to medical services and repair services generally. It applies to most new goods.
With the growth of the Internet in the first two decades of the twenty-first century, information regarding prices and even quality is freely available. It costs no extra money to do a Web search, only time. The richest man in history in mid-2018 was Jeff Bezos, who founded Amazon. He was worth $141 billion. This was up $31 billion since the beginning of the year. He attained this wealth by cutting prices and gaining free reviews from purchasers. Rival sellers see Amazon as a ruthless competitor. Buyers do not agree. Amazon provides rapid price information on three billion items. This is steadily growing. The zones of price ignorance shrink. This means that the zone of price negotiation shrinks. Competition is minimized between buyer and seller. Online, it does not exist. Sellers of new goods on Amazon declare: “Take it or leave it.” But sellers of used products, especially books, can compete by price. For those buyers who are content with a clean used book, low bid wins—low from the seller’s point of view. This means high bid from the point of view of the buyer: “more books for the money.”
When buyers compete against buyers, and sellers compete against sellers, this competition produces greater cooperation between specific buyers and specific sellers. How? It reduces the zones of ignorance, which reduces potential competition. Exchanges take place more rapidly, meaning less time wasted. Put differently, competition lowers transaction costs. This increases the net return from exchanges. The law of price asserts itself: when the price falls, more is demanded. Specifically, when transaction costs fall, more transactions are demanded.
3. “Sellers Are Dominant Over Buyers”
On the contrary, buyers are dominant. Here is the reason. By common usage, buyers possess money. They pay money to sellers. What is money? Money is the most marketable commodity. A highly marketable asset has these characteristics. It can be sold immediately without: (1) offering a discount, (2) paying a commission, or (3) advertising. When you walk into a store, and you see something you want to buy at a listed price, the seller will not argue with you if you offer to pay him his listed price. He may try to sell you something in addition to it. If you have cash, you may be able to negotiate a discount in a small shop owned by the seller. If it is a used item, you may be able to negotiate a discount. Why? Because the local seller has a limited market. You tell him that you want to buy the item. He wants to sell it. But there may be no other person today or this week or this month who will want to buy that item at anywhere near the listed price. He wants your money now. He has bills to pay. He wants to buy more inventory. He suspects that you may not need the item at all. You have lots of other items or services you would like to buy with your money. Every seller in town wants your money at retail prices. All sellers are competing with each other for ownership of the most marketable commodity. Only a comparatively few buyers are competing with each other to buy what specific sellers sell.
In rare cases, the seller does not need to sell, but the buyer needs to buy. I have already mentioned the premier case: an oasis. Here, the seller can charge all the traffic will bear for his water. (The phrase, “all the traffic will bear,” comes from an anti-capitalist, anti-railroad American novel published in 1901, The Octopus.) There is no local market that is less developed than an oasis in a desert. But the traffic to and from an oasis is minimal. With the increase in airline traffic, oasis traffic is steadily being reduced. The few people who stop by for a drink of water are poor people. The owner of the oasis cannot get rich from their payments.
The free market’s critics have contrasted competition with cooperation. The two categories are not the same. The critics do not understand how the market’s auction process works. Its twin sanctions of profit and loss increase cooperation between buyers and sellers. The auction process does this by means of competition: buyers vs. buyers, sellers vs. sellers. It is out of this competition that prices are formed. The profit-seeking participants in the market for information then spread information regarding prices to millions of buyers and sellers. Amazon illustrates this better than any company in history.
These are two forms of market competition: quality and price. Quality competition is appropriate when selling to wealthy people or people with authority. Price competition is appropriate when selling to the rest of humanity.
1. Quality Competition
The great master of quality competition in the Bible was Joseph. “Joseph's master took him and put him in prison, the place where the king's prisoners were confined. He was there in the prison. But the Lord was with Joseph and showed covenant faithfulness to him. He gave him favor in the sight of the prison warden. The prison warden gave into Joseph's hand all the prisoners who were in the prison. Whatever they did there, Joseph was in charge of it. The prison warden did not worry about anything that was in his hand, because the Lord was with him. Whatever he did, the Lord prospered” (Genesis 39:20–23). [North, Genesis, ch. 32:B]
His life best illustrates Jesus’ principle of dominion through service. God requires His people to seek increased responsibility. This is the strategy of dominion. God has a program that enables His people to gain more authority in history. This program requires His people to provide improved service to buyers. They must learn to be better performers than the competition. They must distinguish themselves as suppliers of desirable goods and services. This is especially important for covenant-keepers who are in a minority condition either socially or economically. This is how they pull themselves out of poverty and social inferiority. They pull themselves out by being lifted up by people who are richer and better connected socially. These people do not do this as a favor. They do it with their money. They pay economic and social outsiders for superior service.
There are two ways to provide improved service. One way is to cut prices. You provide the same quality of service for a reduced price. The other way is to improve service at the same price. Both ways provide additional benefits to the buyer. This makes repeat business more likely. Over time, the person who supplies superior service gains the confidence of the person buying the service. The person buying the service steadily transfers greater responsibility, meaning greater authority, to the person who is supplying superior service.
The case of Joseph in Egypt is the classic case in the Bible of somebody who supplied superior service. He first supplied superior service to his father, which enraged his brothers. They sold him into slavery. That enabled Joseph to be in a position to gain enormous authority in Egypt. Potiphar bought Joseph from the slave traders. Joseph became a superior servant in Potiphar’s household. Potiphar transferred great authority to Joseph as a result. Because Potiphar’s wife betrayed Joseph, Potiphar put him in prison. This prison was the Pharaoh’s prison. This was the perfect place for Joseph to move up the ladder of authority. Joseph became such a good organizer that the overseer of the prison transferred all authority to him. Next, Joseph provided excellent service to the two banished employees of the Pharaoh, both of whom wanted their dreams interpreted. He provided accurate interpretations. The survivor was in a position two years later to recommend Joseph’s services to his employer, the Pharaoh. This led to the next stage of Joseph’s responsibility: interpreting Pharaoh’s dream. This led to the next level of authority, when Pharaoh placed him second in command in Egypt. In this office, he saved the lives of his family. Had he not been the most efficient servant in Egypt, he would not have been able to do this.
His service was based on quality competition. As a slave, he supplied services for the cost of room and board. He supplied above-average services at this exceptionally low price. This is how he distinguished himself from all of the other servants in Egypt. He need not have been so efficient. He could have supplied services that most slaves supplied, or most prisoners supplied. But he recognized that he was in a position to represent God before these pagans, so he supplied good services. God blessed him as a result.
This principle of quality competition is easy to understand. His brothers understood it. They understood that his performance was going to lead to his superiority over them. They resented this. As it turned out, this is exactly what happened. But it did not happen in the promised land. It happened in Egypt. There were probably other slaves in Potiphar’s house who resented him. Undoubtedly there were prisoners in Pharaoh’s prison who resented him. But his customers welcomed his performance. They were not getting something for nothing, but they were getting exceptionally valuable services for practically nothing. Every buyer likes a better deal. Quality competition is suitable when you are selling to people with considerable wealth. Potiphar had wealth. He could afford to buy a slave. He had a large household that required careful management. The jailer probably did not have wealth, but he had authority. He was in control of the operations of the prison. He was in a superior position. Pharaoh had enormous wealth and enormous power. In contrast, price competition generally targets a different market: people without great wealth.
There is no inexpensive way for existing sellers to complain against new sellers who provide exceptional quality. The buyers have money. They presumably are experienced buyers. They are well aware of what they want. They have time to shop for sellers who can supply them with better services. They may be politically well-connected. An existing seller cannot find a ready argument to complain against an interloper who provides an exceptionally good service. This is why quality competition is a good strategy for extending dominion. It produces minimal organized resistance from existing suppliers. But it is not the only strategy. There is also price competition.
2. Price Competition
The poorer a customer is, the more that he is motivated to buy in terms of price. He has limited funds. He must spend a high percentage of his income on necessities: food, shelter, water, heat, and lighting. As he grows wealthier, he increases his consumption of what he previously had regarded as luxuries. This is the effect of declining marginal utility. After he consumes the basics, which are high on his list of priorities because of their high subjective value, the value to him of one additional unit of monetary income falls. He purchases goods and services that previously had been too expensive for him. He ran out of money before he could buy them. Now he can buy them.
He may buy more of the same category of consumption units. If he lives in a cramped space, he may rent additional space. His next move upward spatially may also be a move upward socially. He rents in a safer neighborhood or a neighborhood with better access to transportation. These are quality improvements, meaning lifestyle improvements. But he is still concerned about price. He does not want to pay more than he can buy through careful shopping and sharp negotiating.
Existing sellers face consumer resistance. Most people have tight budgets. They cannot afford to buy on a whim. To get them to buy, some sellers adopt new sales strategies. One way is to offer loans to buyers. This appeals to people who discount the value of future income at a higher rate. They are more present-oriented. They think: “I would rather consume more now rather than later.” They spend borrowed money now. They must therefore reduce their consumption in the future because they will have to repay the debt plus interest. This marketing strategy is based on increasing present demand. Some buyers allocate their wealth by shifting consumption from the future to the present. Debt enables them to do this.
Another way to increase sales is to change the advertising. The seller can increase his advertising budget. Or he can design marketing campaigns to increase the number of whim-based purchases. This persuades buyers to change their budgets. They had purchased other items before. Now they buy something new based on impulse buying. They will have to pay for this later when they find that they are running out of money faster than they had expected or planned for.
In poor societies, the most effective means of increasing sales is through price competition. Sellers lower their prices. This enables new customers to buy. These are customers who would not have bought earlier at a higher price. They had been willing to buy at a lower price, but no seller had offered a lower price. Now they buy. Price competition can also increase purchases by existing customers. They want to increase their consumption of items already in their budgets. Maybe they buy more fuel to heat their homes at a higher temperature or for more hours during the day.
In the early decades of the Industrial Revolution, price competition was the most widely used sales strategy. Sellers offered goods to people who had not been able to afford anything like them. Cotton clothing was a major category. Cotton clothing had major advantages over wool. Cotton fabrics could be washed and dried more easily and therefore more often. Wives greatly appreciated this. Cotton fabrics could be colored more easily. This was good for making fashion statements. Wives also appreciated this. The Industrial Revolution accelerated after 1800. The French Revolution of 1789–1794 had radically changed people’s fashions in Western Europe. The clothing of the poor people in Paris became the new standard. Ornate clothing disappeared among the males of the aristocracy, along with wigs. Women’s fashions became more sensitive to color than to ornateness. Next, cotton clothes were lighter. This was a great advantage in summer. Rich people had worn cotton clothing for centuries. Poorer people wanted to take advantage of the cotton clothing, but they could not afford to buy it. This changed after 1780, and it accelerated after 1800. Because of technological innovations in cotton production, mainly the introduction of cotton gin in 1800, and also by improvements in the mechanized production of yarn and fabric, cotton manufacturers cut costs. Here is the law of supply: “When costs fall, more is supplied.” Sellers increased their production. Then they had to find ways to sell this new production. The most cost-effective way was to lower prices. Here is the law of demand: “When prices fall, more is demanded.” Sellers lowered prices. Sure enough, more was demanded.
This dual process of innovation in production and marketing launched an historically unprecedented era in man’s history. Per capita economic growth has continued in the West at an annual rate of over 2%, except for the Great Depression (1930–39). Compound economic growth has spread to Asia ever since the end of World War II in 1945. Mass production and price competition have jointly transformed the world.
Price competition is seen as a scourge by existing producers who find it difficult to compete. But it is seen by consumers as a great benefit. This benefit is more easily seen over decades than it is year to year. Year to year, we do not perceive the change. Over decades, we do. When we study economic history since 1800, this change seems inconceivable. In 1800, it was inconceivable. Yet this has taken place in a short period of time.
How short? I offer the following evidence. John Tyler was the tenth President of the United States, 1841–1845. He was born in 1790, the first full year of President George Washington’s administration. Except for cheap printing, the world of 1790 was not fundamentally different from the world in the time of Jesus in the first century A.D. Most men worked as farmers. They used marginally better tools in 1800, but per capita wealth had not changed much. Brief eras of greater wealth had always led to a larger population. There were more people in 1790 than in Jesus’ day. There were perhaps 250 million people at the time of Jesus’ birth. There were possibly a billion people in 1790. Travel was still as slow as it had been in Jesus’ day. Roads were poor. Stone roads leading to Rome were superior. Chariots could travel on them except when the roads were frozen or covered with snow. Most people’s homes were small in 1790. Heating them was still based on wood, which was inefficient, although cheap in North America east of the Mississippi River: mid-continent. Labor time in chopping down trees and then chopping them into firewood was still high. Only after David Rittenhouse’s 1780 improvement of Ben Franklin’s 1741 iron stove did iron stoves begin to sell well. Lighting was by candles. These candles were not much different from the one invented by some Roman in 500 B.C. There was no system of aqueducts comparable to Rome’s.
Here is the astounding fact: in December 2010, I interviewed Tyler’s grandson. As I write this, he is still alive. So is his younger brother, who was interviewed on national television in 2012. (http://bit.ly/TylerInterview2012) The transformation of the world took place in three generations in one family.
Existing competitors resent the intrusion of an innovative seller who prices his goods and services significantly below prevailing prices. Existing competitors know that some of their customers will start buying from the competitor. Their income will fall.
1. Asymmetric Politics
Customers appreciate it when they have a wider range of choices. They also appreciate it when sellers begin to offer better deals to them. They understand that they are benefitted by an increasing supply of goods and services. But there is a problem. Customers are also producers. In their own areas of service, they resent newcomers who offer superior deals. Because most of their income or even all of their income is dependent upon their salaries, they are focused more on the threat offered by a new competitor than they are on the benefits of multiple competitors coming into the markets in which they are buyers. They buy from many sellers. A new seller is a benefit, but generally his presence will not make a large difference in the life of a customer. In contrast, the presence of a new competitor in the market in which a customer derives his income is a major threat. Therefore, citizens tend to be more responsive to politicians who promise that they will not face competition as producers.
Politicians in search of campaign contributions promise special-interest groups to vote to limit the number of competitors entering into a particular market. They gain support from existing suppliers in a market. It is much more difficult for politicians to mobilize consumers in general to resist intrusions into a marketplace that will reduce the number of suppliers. Politically, the two markets are asymmetric. It is less costly for a politician or a representative of a special-interest sellers’ group to persuade employees in a specific industry or occupation to pressure their politicians to erect barriers to entry into their market than it is for a rival politician to persuade employees in many different fields to pressure their politicians to oppose the imposition of a new barrier to entry into a specific market. This is why there are continual pressures on politicians to provide subsidies to specific industries or else create barriers to entry against price competitive sellers in specific industries. A legal barrier to entry into an industry has the same economic effect as a subsidy to that industry. But a barrier to entry is generally less controversial politically than an outright subsidy. Voters can understand a subsidy. They are paying for it. Voters generally do not understand that a barrier to entry is an indirect subsidy.
2. Consumer Protection
Politicians and special-interest groups use the argument that price competition lowers the quality of goods. Therefore, price competition exploits the poor. This argument has been used in the West for a millennium or longer. Voters still believe it. They are persuaded to believe that a lower price means lower quality. Sometimes it does, but this is not always the case. With the development of digital products, this argument is no longer as popular as it was. Consumers understand that lower prices can also be accompanied by improved quality. The pace of innovation is far greater in digital industries than it has been in any other industry in history.
The argument that consumers must be protected against predatory sellers is the primary argument in favor of occupational licensing. Occupational licensing has spread across the West at a rapid pace ever since the end of World War II in 1945. Occupational licensing is a barrier to entry. It raises the price of goods and especially services by reducing the number of sellers. It reduces the number of choices available to poor people. It also reduces the number of choices available to rich people. But rich people can afford to spend more for what they buy. Poor people find it difficult to spend more.
The implicit assumption behind occupational licensing is that customers do not really know what they want. They do not really know when they are being served well. The government then intervenes in the market to impose barriers to entry. These standards are officially based on quality rather than price. The quality standards that are adopted by the regulatory agencies are usually supplied by the special-interest groups (trade associations) that represent existing sellers in the industry. Existing sellers are promised that they will not be required to go through the formal testing process that will screen out future competitors. So, they become the beneficiaries of the new regulations. They will not face as many new competitors who are likely to compete on the basis of reduced prices.
The law of the market is this: high bid wins. But the market is only one aspect of the social division of labor. There are also covenantal institutions: family, church, and state. These are not governed by the principle of high bid wins. Their varying systems of institutional sanctions are not based on the profit-and-loss system of the market. Why is this the case? Because the market allows the sale of privately owned property. This is the meaning of high bid wins. A man does not have the legal authority to sell his wife into servitude. He does not have the right to sell his citizenship to a non-citizen. The same is true of church membership. This is why economic analysis that explains the market process quite well applies poorly or not at all to covenantal institutions. I have discussed this at length in my book, The Covenantal Structure of Christian Economics (2nd edition, 2018).
There are some services that are related to issues of life and death. I call these priestly functions. The obvious example is medical care. If entrance into this market were open to all, then the price of medical services would be lower. Competition would lower prices. This was understood by the classical Greeks. In the oath attributed to a physician, Hippocrates, who lived in the fifth and fourth centuries B.C., we read this. “I swear by Apollo the Healer, by Asclepius, by Hygieia, by Panacea, and by all the gods and goddesses, making them my witnesses, that I will carry out, according to my ability and judgment, this oath and this indenture.” It was covenantal. It invoked gods. The oath to the gods created a priesthood. The promise to the teacher was a way to create a cartel: a closed group that could charge consumers high prices for secrecy-based services.
The oath was a self-maledictory oath. It called down the wrath of the gods on the oath-taker if he violated its terms. “Now if I carry out this oath, and break it not, may I gain for ever reputation among all men for my life and for my art; but if I break it and forswear myself, may the opposite befall me.” As with all covenantal oaths, it had an ethical component. “I will use treatment to help the sick according to my ability and judgment, but never with a view to injury and wrong-doing. Neither will I administer a poison to anybody when asked to do so, nor will I suggest such a course. Similarly I will not give to a woman a pessary to cause abortion. But I will keep pure and holy both my life and my art. I will not use the knife, not even, verily, on sufferers from stone, but I will give place to such as are craftsmen therein.”
The next section was a promise to the man who taught him medical secrets. This was a strictly economic component. It was self-serving on the part of the teacher, who was conveying valuable information in exchange for the promise of future support. “To hold my teacher in this art equal to my own parents; to make him partner in my livelihood; when he is in need of money to share mine with him; to consider his family as my own brothers, and to teach them this art, if they want to learn it, without fee or indenture; to impart precept, oral instruction, and all other instruction to my own sons, the sons of my teacher, and to indentured pupils who have taken the physician’s oath, but to nobody else.”
Members of this priesthood could charge high prices for services rendered. They would face reduced competition because the secrets could not be shared by existing members without violating the oath. This restriction on the production of suppliers is the classic mark of the guild or cartel. This was a strategy of restricting supply by a barrier to entry: the oath.
This oath was a mixture of two elements: a self-maledictory oath to gods and a promise to support the teacher if he ever needed support. This was an income-insurance program. It reduced the teacher’s risk. This was also a brotherhood. The oath and the brotherhood were self-serving.
This oath was not enforced by the state. Formally, it was enforced by the gods. Fear of the gods was supposed to keep the student from violating the oath by sharing the priesthood’s secrets with outsiders who were not bound by the oath. This would keep prices higher than what would have prevailed in the absence of the oath.
The Mosaic law had a priesthood. It was a closed community. Only members of the tribe of Levi could be priests. Levites were paid a tithe of the net output of farmland (Exodus 18:21). In addition, priests officiating at the altar received the various food offerings that the people offered to God at the tabernacle/temple (Leviticus 2:3–10, 4:26, 7:6, 23:10–11, 19–20; 24:9). Also, they officiated at a leper’s offering of oil (Leviticus 14:10–13). One of the reasons why they publicly ate the offerings was to make it clear to the people that the offerings were not consumed by God. God did not need their offerings. The error of assuming that there are gods who needed offerings afflicted the offerings of other ancient civilizations. If a Levite had a side business, he faced competition. He had no privileged position in his profit-seeking professions. He could not charge higher prices than the market established without facing the threat of price competition. In the New Testament, ministers are paid salaries by the church. “Let the elders who rule well be considered worthy of double honor, especially those who labor in preaching and teaching. For the Scripture says, ‘You shall not muzzle an ox when it treads out the grain,’ and, ‘The laborer deserves his wages’ ” (I Timothy 5:17–18). They were to receive no other compensation for their labor, such as the sale of baptismal services or the Lord’s Supper. The ministers had a monopoly over the administration of the Lord’s Supper. This was not to be abused by converting the sacrament into a source of extra income beyond a salary for all of their labors. In the Roman Catholic church, any priest who charged for the last rites would be brought under discipline.
In certain rare cases, a physician may be in a unique position to administer life-saving aid to an injured person. The injured person is not in a position to bargain. He cannot shop for medical services. There is a temporary barrier to entry into a local market. The Mosaic law laid down an ethical principle: do not harm widows and orphans. Widows and orphans were representative examples of people without defense or defenders. This law rested on a basic biblical principle of ethics. Thus, for a physician to charge the injured person all of his wealth, and even get him to sign a contract to this effect, would be a violation of this principle. While there is no biblical civil law against this, there is also no biblical civil law requiring a court to enforce the terms of the contract. I can think of no society in which such a contract would be enforced. The physician would risk losing his reputation if he tried to collect this payment, let alone took the now-healed person before a court. The medical guild might even revoke the person’s license to practice medicine, at least if the case received a lot of publicity. Even if other medical guild members did not see the unethical aspect of such a contract, they would not want to risk scrutiny by the civil authorities, who might establish a law to control the profession as compensation for granting it a monopoly through licensing. They prefer self-regulation by an ethical board to outright intervention by politicians or bureaucrats. On the other hand, if a physician provided such services for free, but the patient died or suffered permanent harm as a result of the emergency treatment, no civil court should honor the claim. In the United States, numerous states have passed laws exempting a physician from legal liability if he treats an injured person at the roadside. These laws are called good Samaritan laws, named after Jesus’ parable of the Samaritan who helped the injured victim of robbers (Luke 10:25–37).
Contracts are not sacred. They are not oaths taken before God. They are therefore not covenantal. While a society faithful to the Bible will create a civil court system that enforces private ownership, which means that it enforces the right of contracts in exchanges of ownership, these courts have the right to refuse to enforce the terms of a contract if it violates explicit biblical laws or fundamental biblical principles. Every society has contracts that its courts refuse to enforce. The more predictable these non-enforced contracts are, the fewer of them there will be. The likelihood of non-enforcement raises the price of collecting from buyers or sellers. When the price rises, less is demanded.
Critics of the free market insist that competition is wasteful. They insist that central planning will not waste resources. They say that central planning overcomes a moral weakness of capitalism. They see competition as a moral weakness. They insist that cooperation is morally preferable to competition.
The biblical answer to this line of reasoning is this: when we offer someone else a better opportunity, we are offering to cooperate. No one knows all of the opportunities that are available in a society. Therefore, individuals who believe they can offer a better opportunity approach a buyer to make the offer. The potential buyer decides whether it is a good opportunity. He is legally responsible for the allocation of his money, so he should have the legal authority to make the decision to buy or not to buy. Ownership and responsibility are inseparably linked. When a seller offers a potential buyer an opportunity, he is competing against other sellers. His competition with other sellers is an inescapable aspect of offering to cooperate with a buyer. Therefore, analytically speaking, there can be no cooperation without competition. Anyone who criticizes the free market for being competitive is really criticizing the market for being cooperative.
When Jesus recommended service as the way to leadership, He was speaking to an outcast group of Christians in an outcast nation of Jews. He understood that service is the best way to gain cooperation from hostile people around us. Offering service is an offer to cooperate. So is an offer to sell a product or service.
Market competition is the best way for any group that is discriminated against to gain acceptance in society. Over time, people appreciate better deals. Additionally, outsiders who enter a market through price competition gain resentment by existing sellers. Existing sellers may be able to get the government to restrict price competitive offers. But if the sellers continue to offer price competitive goods long enough, they gain support from at least some segment of the market.
Quality competition is more difficult for existing sellers to oppose. Existing sellers pride themselves on offering high-quality services. They enjoy the reputation of having provided such services. So, when a newcomer enters the market and offers even better services, it is difficult for existing sellers to oppose his presence in the marketplace.
Quality competition usually operates in markets where people have more money, greater prestige, and greater power. They are the Potiphars of this world. It is not easy for poor people or even middle-class people to come into contact with rich people. Rich people surround themselves with screeners. The screeners do their jobs well. They make it difficult for new sellers to contact rich people directly. In contrast, price competition, when legal, enables new sellers to penetrate an existing market. The seller may not have to be in a face-to-face relationship with the buyer. He just has to offer his product at a significant discount from what existing sellers ask buyers to pay. It is possible for an outsider to get exceedingly rich through price competition. At the beginning of the twentieth century, Henry Ford did this by selling a low-cost automobile, the Model T. But the supreme example of a man who got rich through price competition is Jeff Bezos, who started a discount bookselling company in 1995: Amazon. A quarter century later, he was the richest man in history before his divorce settlement. He was the richest man in history even after his divorce settlement.
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The full manuscript is here: https://www.garynorth.com/public/department196.cfm