Chapter 28: Markets and Discovery
Updated: 4/13/20
For the kingdom of heaven is like a landowner who went out early in the morning to hire workers for his vineyard. After he had agreed with the workers for one denarius a day, he sent them into his vineyard. He went out again about the third hour and saw other workers standing idle in the marketplace. To them he said, ‘You also, go into the vineyard, and whatever is right I will give you.’ So they went to work. Again he went out about the sixth hour and again the ninth hour, and did the same. Once more about the eleventh hour he went out and found others standing idle. He said to them, ‘Why do you stand here idle all the day long?’ They said to him, ‘Because no one has hired us.’ He said to them, ‘You also go into the vineyard’ (Matthew 20:1–7).
I have analyzed this passage in Chapter 40 of my commentary on Matthew. This parable rests on an assumption, namely, that information regarding supply and demand is limited. We know it to be limited in our own lives, and Jesus here was saying that this limitation extends to the entire economy.
A landowner wanted to hire workers to work in his field. He found an initial group of potential laborers. He offered them a price: one denarius per day. All of them took the offer. They went into the fields and labored the full day. Somewhat later in the day, the landowner went to a location where he expected some workers to be available. He was correct. He offered them something in return, but he was not specific. He must have had a good reputation, because he was able to employ additional laborers. They trusted his promise to pay them a fair wage for their labor. He repeatedly did this. They all agreed, and they all went into his fields to work.
There was a discovery process for both the employer and the employees. He did not know what to expect early in the morning. Neither did the day laborers. They had hopes of coming to an agreement and gaining employment. He had hopes of hiring people at a wage he was willing to pay. But neither side knew in advance that they would be able to consummate the transaction. This scenario was repeated four additional times in one day. Even so, there was limited information in the community. Late in the day, there were still potential workers standing around, hoping that somebody would make them an offer.
This parable would make no sense if there were widespread knowledge of the conditions of supply and demand for labor. This parable assumes that, even in a tightly knit community where people could walk from the marketplace to a specific landowner’s fields, there was insufficient information regarding (1) his desire to hire employees and (2) employees’ desire to work for a wage. When Jesus presented this parable, He did so on the assumption that the initial conditions of the parable would be believable to his audience. They would understand that information regarding economic conditions is limited even in a local community.
If word had gotten out that there was employment, some potential employees might have walked to the landowner’s property. This assumes that they knew which landowner was hiring. Presumably, they would have known. But this would have required an investment of time by the workers. They would have had to walk to the place of potential employment. Meanwhile, another landowner might come to the central location in search of employees. Anyone who was not present when that offer was made would miss out. Workers were unwilling to bear the uncertainty associated with searching for available jobs. They believed they would have a better opportunity of gaining employment by being present in the labor marketplace that would have been known to local employers. An employer would have to take the initiative of going to the marketplace, or sending an agent, and making the offer. The employer was the person with money to spend. He had capital. Employees expected him to go to the effort to come to them.
In the parable, there is a marketplace: a well-known geographical location where potential buyers and sellers of labor assemble in order to make profitable market transactions. The search costs are lower in the marketplace than they are anywhere else. Because search costs are lower, the marketplace attracts buyers and sellers of labor. It is a location that serves as a clearinghouse for both employers and employees. This conserves knowledge. It reduces the cost of making mutually profitable transactions. The presence of lower search costs is what attracts buyers and sellers of labor to a single location.
A local marketplace is personal. People have reputations. Specific information about specific workers and specific employers is available to participants on both sides of the employment transaction. This reduces the likelihood of making a decision based on incorrect information. The smaller the marketplace, the greater the impact of personal knowledge in facilitating a voluntary transaction. The larger the marketplace, the more impersonal the available information is. Employers do not have enough time, money, and incentive to make detailed investigations of specific employees who supply common labor services. Employers are far more governed by price than they are by specific information about a specific employee’s background.
The parable is about the kingdom of God. In describing this kingdom, Jesus made it clear that the participants did not have full knowledge of each other’s motivations and abilities. There was great ignorance on both sides of the transaction. This describes our condition inside the kingdom of God. Despite the fact that we know that God is in charge, we do not know all the things that God knows. We do not possess knowledge as creators. We possess knowledge as created beings. We are finite. We are also sinful. We do not see the hand of God in every event around us. In this sense, we see the world as impersonal. But the world is not impersonal. The kingdom of God is not impersonal. This is why God imputes meaning to it moment by moment. This is why Jesus said the following: “I say to you that in the day of judgment people will give an account for every idle word they will have said. For by your words you will be justified, and by your words you will be condemned” (Matthew 12:36–37). A God who is not omniscient would not have a record of everything that everybody has thought and said in history. We can safely conclude that the world is not impersonal. On the contrary, it is comprehensively personal. Therefore, the market process is not impersonal.
The employer had money to spend. Money is the most marketable commodity. In contrast, the workers had only their labor as a marketable asset. Their labor was more specialized than money. There was greater uncertainty associated with the ownership of labor to rent than the ownership of money with which to rent labor. The person with money was presumed by everybody to have superior knowledge of the market. He had been successful in accumulating land and money. He was in the stronger bargaining position. He understood this, and so did the laborers. This is why they remained in the marketplace, in the hope that employers would come to make offers. There was greater risk of rejection of an offer to supply labor than the rejection of an offer to pay money.
There is an inherent asymmetric structure to bargaining whenever one of the parties has money. He is in a stronger position because he has a broader market of available people who will accept his offer to pay money. There are more people competing for ownership of his money than there are people with money competing to buy specific kinds of labor.
Here, I extend this analysis to the economy in general. There is limited knowledge of the conditions of the supply and demand of labor in a local community. Compare this to a regional economy. We might imagine that the latter knowledge would be even less. But is it?
In a regional economy, or in a large city, knowledge of who is hiring and who is willing to rent labor services is not specific. It is not visibly personal. Yet we know that employers are able to find employees. Employees are able to find employment. Unemployment is relatively rare, even in economic recessions. In the worst year of the Great Depression in the United States, 1933, unemployment reached an all-time high of 25%. But this means that 75% of heads of households who wanted to work were able to find jobs.
There was trial and error in the small-town environment of the parable. Nevertheless, from the point of view of actual unemployment, there is greater predictability of the labor markets in today’s world of prices and specialization than there was in the small town of the parable. How can this be?
The market process is, above all, a process of gathering relevant information and applying it to specific circumstances. Information, meaning accurate information, is a scarce resource. The market process is one of constant competition. Sellers compete against sellers. Buyers compete against buyers. They compete in many ways. The primary way in which strangers compete against other strangers is by means of price. Prices are objective. They reveal the state of the market. They reveal that individuals have been willing recently to accept offers at specific prices. The information appears to be highly impersonal, yet people with highly personal priorities, goals, and resources are able to work out mutually beneficial exchanges with each other. There is a constant reconciliation of individual plans of action. Changing prices, more than any other source of information, provide the motivation to make changes in our plans. Prices are relatively inexpensive to convey. Decision-makers can make better decisions because they have access to prices. By better decisions, I mean decisions that enable them to achieve their goals with a lower expenditure of resources than would have been possible if they had not had access to the information.
As the market’s influence spreads, larger geographical units become part of this process of information sharing. Because of international trade, the free market economy extends across national borders. This enables buyers and sellers of goods and services to take advantage of the best possible knowledge available of local circumstances. This kind of knowledge is essential for effective economic planning. It is available on a constant basis through market reporting systems. Prices are easy to communicate. It would be incorrect to call this condensed knowledge. Knowledge is not condensed in a price. What is revealed is either a recent exchange of a specifically defined form of property or else what a seller of the specially defined form of property is willing to accept in exchange for money. With this highly specific information in the form of a price, other decision-makers can decide whether or not to pursue an exchange.
The market process today is dependent upon a price system. The price system conveys information concerning the recent conditions of supply and demand. The larger the market, the wider the range of influence of objective prices. It is not necessary for employers to go to a location somewhere in town in the hope of finding low-cost employees. Nevertheless, such locations do exist in most cities in the United States. Employers hire part-time laborers without contracts. They pay these laborers in currency at the end of the day. These laborers do not have access to the legal employment markets. They may be illegal immigrants. They may be people who are willing to work below a state-mandated minimum wage. Whatever the reason, they prefer not to be part of the normal employment process. Their employment is far more uncertain than the employment provided in the conventional labor markets.
This means that the more impersonal the market, the more predictable it is. It means that the larger the market, the more predictable it is. The reason for this is the price system. Prices are specific. They convey specific information about specific markets. Search costs are low. Competition is widespread. The range of ignorance regarding market conditions is narrow. The need for face-to-face negotiation is less because the range of ignorance is narrow. People know what to expect. The rate of return on accurate information is high.
When someone makes an offer to sell something at a specific price, he is in search of a buyer who is willing and able to pay this price. He does not know where this buyer is, or who he is, or perhaps even where he is. He does not need to know if there is a predictable delivery system, either digital or physical. The delivery system is highly competitive, which means both parties to a transaction can concentrate on the sales price.
With the development of the Internet and specifically the World Wide Web, bidding for information has become international. As the cost of making a bid declines, more people make bids. The more people who make bids, the narrower the range of ignorance of opportunities. People can make more rapid decisions.
Markets are a discovery process. Markets are governed primarily by means of objective prices, but they are also governed by written contracts. Individuals can spell out their responsibilities. They become clearer about these responsibilities. The willingness of individuals to take on more responsibility is the primary dynamic factor underlying economic growth. It is also the essence of the dominion covenant.
As economic growth increases, the number of opportunities also increases. This is the best definition of economic growth: an increase in the number of opportunities available to people with fixed monetary incomes. Their money will buy more. Their money becomes more productive, their time becomes more productive. They seek out a better rate of return on their money. They also seek out a better rate of return on their time. As buyers, they possess money. They seek better prices, better deals, and a better lifestyle. As sellers of labor services, they seek buyers who are willing to pay what they ask. Without the market process, they would be unable to increase the number of opportunities available to them. They do not know where these opportunities are. They can search for these opportunities only because of the market’s process of making available relevant, specific information in the form of prices.
If people knew where the relevant information is, they would not need the market process to guide them to this information. Similarly, in the parable, if the employer had known there was a large supply of available laborers, he would not have had to go back throughout the day to hire more of them. The same can be said of the laborers. They would have shown up early in the morning, and they would have accepted the offer of employment. But they did not know.
The central fact of the discovery process is this: no one knows in advance what is going to be discovered. Humans are finite. They have limited knowledge of themselves and the world around them. This is an inescapable aspect of their finitude. This is why the discovery process itself is eternal. The dominion covenant mandates the extension of man’s control over nature (Genesis 1:26–28). [North, Genesis, chaps. 3, 4] This is not optional. This is definitional. It literally defines mankind.
The model was established in the garden. Adam and Eve had limited responsibility within the confines of the garden. But in the midst of the garden was a river that broke into four rivers, and these rivers would have carried mankind out of the garden into the world. Adam and Eve were to start small, but then they were to extend their dominion geographically. But this extension was not simply geographical; it was intellectual. They had to have greater understanding of the cause-and-effect system that governs the world. This is a never-ending process. Man is finite; God is not. Man has a responsibility to extend his dominion because he is made in God’s image. But he will never be omniscient. The discovery process is an eternal process. It is a characteristic feature of mankind.
The primary form of dominion is not biological or geographical. This is because population growth in Eden, if compounded at 5% per annum, would have filled the earth in a few centuries. So, the primary form of dominion is intellectual. Each new discovery opens up new realms of investigation. Each question that gets a preliminary answer by some creative individual raises new questions that call forth new investigators and new approaches to investigation. Not only does man’s knowledge not approach the omniscience of God; it moves in the opposite direction. The more that men learn, the more questions they have. The more that men extend dominion operationally in their environment, the more opportunities for greater dominion are discovered.
The private property system that is established by biblical law is the judicial foundation of constant innovation. Someone who discovers a profitable approach to solving a particular problem becomes responsible for the administration of that process. In order to encourage this extension of personal responsibility, the private property legal system allows discoverers to profit economically from their discovery. There is an economic incentive associated with the discovery process. An inescapable aspect dominion is an increase in personal responsibility. Therefore, God has established the central benefit of the private property legal order: economic encouragement for people to seek out new opportunities to exercise greater personal responsibility.
Ownership establishes personal responsibility. This responsibility is legal: trusteeship. It is also economic: stewardship.
The biblical-based discovery process is based on the private ownership of property. Private ownership is an incentive to pursue innovation. This discovery process links the responsibility of innovation with the benefits of innovation. The person who discovers a new process or insight is legally allowed to profit economically from his discovery. He must take responsibility for it, but this responsibility is always associated with potential benefits. There is a positive incentive for taking responsibility. This incentive is increased personal wealth. The positive sanctions associated with obedience to biblical law (Deuteronomy 28:1–14) are manifested in higher rates of innovation than in societies in which private property is not widely dispersed and defended by the civil government.
The discovery process is an aspect of the biblical doctrine of imputation. It is the ability of an individual to discover correlations between general laws, including economic laws, and predictable outcomes. Men are made in the image of God. Therefore, they have an understanding of God’s laws of causation. Individuals find themselves in specific historical and geographical conditions. They have the responsibility of extending dominion in these areas of personal responsibility. To do this, they must make judgments regarding the correct application of general principles of causation in relationship to the historical world around them. This is the procedure of modern science. This is also the procedure of entrepreneurial innovation.
Imputation is subjective. It involves the application of objective rules of order to objective historical conditions. It is this combination of subjective evaluation of historical facts and rules of creation that is the essence of both science and entrepreneurship. Neither the scientist nor the entrepreneur knows in advance if he is going to be successful in his investigations. Neither individual can say with any degree of accuracy what the nature of the discovery will be. The market’s discovery process, like the scientific investigation process, involves uncertainty. This is why the discovery process of the free market, like the discovery process of modern science, does not enable the practitioners to specify in advance what exactly it is that they are attempting to discover. They are attempting to discover solutions. They have only the vaguest understanding of the outline of these solutions.
The private property system establishes the general terms of ownership of new ideas and processes. Because it authorizes entrepreneurs to profit from their discoveries, this system encourages individuals with specialized knowledge to pursue this knowledge in ways that may reward them economically. This is how knowledge, which is widely dispersed, is put to the service of consumers. But these consumers are themselves innovators to some extent. They have participated in the discovery process. They have been successful to some degree, which is why they possess money. They can therefore reward successful producers who serve their wants efficiently. The private property legal order creates a system of objective feedback. There is positive feedback: successful innovators prosper. There is negative feedback: unsuccessful innovators run out of money and cease to compete in the marketplace. They cease buying resources from successful entrepreneurs. In this sense, the entrepreneurial system reflects the final judgment. It also has a system of positive feedback: inheritance by covenant-keepers. It has a system of negative feedback: disinheritance of covenant-breakers. Covenant-keepers continue to innovate and exercise dominion throughout eternity in the new heaven and new earth (Revelation 21, 22). Covenant-breakers never again gain access to scarce economic resources (Revelation 20:14–15).
We learn in the parable of the field owner and the day laborers that there is imperfect information in this world. Perfect information is possessed only by God: omniscience. This is an incommunicable attribute of God.
The overwhelming benefit of the Bible’s private property legal order is this: it enables individuals to identify who is responsible for property management. There is a fixed connection between ownership and personal responsibility. Any attempt to undermine this connection is an assault on biblical ethics. The dominion covenant involves the extension of man’s dominion across the face of the earth. This inescapably requires men to exercise personal responsibility. In order to encourage men to exercise dominion, the private property legal order authorizes innovators and entrepreneurs to profit from their discoveries. It is this strong element of economic self-interest that undergirds the extension of the dominion covenant in history and in eternity. The private property legal order offers rewards to individuals who possess accurate knowledge of how to apply general principles of economic organization to specific historical conditions. This kind of knowledge is decentralized. If there is no system of rewards associated with the possession and implementation of this knowledge, innovation will be minimal.
The following analysis rests heavily on the insights found in the 1944 book by Ludwig von Mises, Bureaucracy. There are two forms of management: bureaucratic management and profit management. In theory, property can be managed primarily by civil government. This is the bureaucratic management model. Property can also be owned by individuals and corporations. This is the profit management model. Bureaucracy is a top-down model. The process of discovery is directed from the top. Profit management is a bottom-up model. Discovery is at the periphery institutionally. One ownership system involves the assumption of greater practical wisdom through bureaucratic management. The other involves the assumption of greater practical wisdom through individual enterprise.
I add the following insights. The bureaucratic management model universally conceals personal responsibility for failure and therefore also for success. Successful bureaucratic innovators are not rewarded by allowing them to share in the ownership of their discoveries. Bureaucratic promotions and raises are based on seniority, not successful innovation. In contrast, the profit management model is most successful when those who are responsible for an innovation and the profits resulting from innovation are rewarded in terms of their contribution to the process of discovery. An important aspect of the discovery process in profit management is the discovery of new ways of rewarding successful innovation within corporations. Owners of corporations who delegate to managers who in turn discover ways of rewarding successful innovation benefit from a higher rate of return on their economic investment in ownership.
Relevant knowledge is decentralized internationally. It is highly specialized. No central planning agency can identify who possesses which kind of knowledge. It cannot identify how this knowledge can best be put to the service of consumers. Compared to the discovery process of the free market, central planners are blind. They know the value of nothing, and they also know the correct price of nothing. They are doubly blind.
The private property legal order establishes a legal connection between ownership and personal responsibility. This is the central legal benefit of the private property order. It is also the central economic benefit of the private property order. It is beneficial in both senses: trusteeship and stewardship.
Ownership and responsibility are connected legally in the biblical legal order. The dominion covenant requires men to extend dominion in history and eternity. This means that they must take greater responsibility. This in turn means that they must increase their ownership or management of scarce resources. They must become trustees and stewards of these resources. In order to encourage men to accept this increased responsibility, the Bible’s private property legal system enables successful entrepreneurs to benefit from their discoveries. This lure of greater economic wealth is a primary motivation for successful entrepreneurship. Successful entrepreneurship inevitably extends the dominion covenant.
Biblical economic analysis must adhere to this presupposition: the success of an economic system is necessarily based on a rejection of the ideal of mankind’s perfect knowledge. Given the complexity of today’s markets, any assumption that there is anything remotely resembling perfect knowledge would be regarded as utterly preposterous by anybody except someone with a graduate degree in economic theory. Incredibly, modern economic theory rests on the assumption that the proper model for economic analysis is men’s omniscience regarding conditions of supply and demand. These are the conditions required for the initial analytical assumption of perfect knowledge. There is no entrepreneurship in such an economy. There is no entrepreneurial role to play in allocating resources in terms of superior knowledge of local conditions. There can be no monetary prices, since money exists to compensate for a lack of knowledge. Yet the theory relies on monetary prices in its graphs and equations. This is the theory of equilibrium. I have offered my critique of this theory in Chapter 54 of the Teacher’s Edition.
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