Chapter 37: Economic Growth
Updated: 4/13/20
If you listen carefully to the voice of the Lord your God so as to keep all his commandments that I am commanding you today, the Lord your God will set you above all the other nations of the earth. All these blessings will come on you and overtake you, if you listen to the voice of the Lord your God. Blessed will you be in the city, and blessed will you be in the field. Blessed will be the fruit of your body, and the fruit of your ground, and the fruit of your beasts, the increase of your cattle, and the young of your flock. Blessed will be your basket and your kneading trough. Blessed will you be when you come in, and blessed will you be when you go out (Deuteronomy 28:1–6).
God promised to bring blessings on the nation in response to Israel’s covenantal obedience. These blessings included wealth. Deuteronomy 28 is a recapitulation of Leviticus 26. It announces dual sanctions: blessing and cursing. The chapter begins with blessing; it ends with cursing. The section on cursing is much longer than the section on blessing. It announced a system of predictable sanctions in history: covenantal rebellion by Israel would lead to God’s imposition of these sanctions. This is why this passage and Leviticus 26 are the most important in the Bible—along with Deuteronomy 8:15–18—for the development of an explicitly biblical social theory. [North, Deuteronomy, chaps. 21, 22]
These promises related to measurable quantities—“increase,” “plenteous”—of specific goods. “Increase” referred to storage implements: baskets. The numerical objectivity of these reference points is crucial for this passage. These were not exclusively inward blessings. The fulfillment of these covenantal promises, Moses told the nation, will be visible to the Israelites and also to their enemies. These blessings will serve as evidence of God’s sovereignty over history through the predictability of His covenant relationships. The blessings and cursings of God under the Mosaic covenant were sure. They were connected to God’s law. This implied that there was a bedrock objectivity that united covenant-keepers and covenant-breakers. That which God regarded as a blessing, Moses told Israel, all men would regard as a blessing; the same was true of cursing.
The lists of blessings and cursings in Deuteronomy 28 were premised on an agreement among subjective evaluators. There are therefore shared objective standards of discourse and evaluation. This objectivity is not undermined by subjective evaluations by individuals. The subjectivism of individual perception would not overcome the objectivity of the corporate sanctions. Israel would enjoy more blessings than the surrounding nations if the people obeyed God’s law. But they would be visibly, objectively cursed if they disobeyed. The idea of national blessings and cursings rests on the existence of objective measures. For men to make such evaluations, numerical measures must apply to the external world. To own a larger number of desirable goods is superior to owning fewer of them. However clever or arcane the methodological subjectivist may become, there is no escape from Deuteronomy 28. The objective superiority of more is assumed by God. Other things being constant, it is better to be rich and healthy than it is to be poor and sick.
This passage ratifies the legitimacy of individual comparisons of national wealth. An individual may lawfully seek out evidence of superior performance of any society. At the same time, this passage does not ratify the legitimacy of government-funded comparisons of national wealth. The collection of economic or other performance data by the government, except for military-related purposes or other aspects of law enforcement, is illegitimate. To use state coercion to fund data-gathering is a form of illicit numbering. The Mosaic law made it clear that numbering was lawful only in preparation for holy warfare, a law that David disobeyed (I Chronicles 21:1–3). It was not to be a common activity of the state.
Defenders of the central planning bureaucratic state can justify its efficiency only on the basis of its possession of more accurate and more relevant information than the private sector possesses. Statistics becomes a necessary political justification for socialism and interventionism. Strip the state of its access to this pretended knowledge, and you strip away its aura of omniscience. The point of Deuteronomy 28 is not that there are objective measures of economic performance that are available to state economic planners. On the contrary, the point of this passage is this: the way to wealth, both individual and corporate, is through systematic adherence to biblical law. Politicians should not authorize bureaucrats to use compulsion to collect data so that other bureaucrats can devise coercive policies that supposedly will increase the nation's economic output. Instead, they are to content themselves with the enforcement of God’s law in a quest for civil justice. Whenever they are successful in this limited venture, per capita wealth will increase.
The Bible relates economic growth to the fulfillment of God’s dominion covenant. The metaphor of growth is basic to the biblical ideal of planting and reaping. “You will bring them and plant them on the mountain of your inheritance, the place, the Lord, that you have made to live in, the sanctuary, our Lord, that your hands have built. The Lord will reign forever and ever” (Exodus 15:17–18). The Bible describes the process of social progress in terms of the language of planting and harvesting a crop. [North, Exodus, ch. 17]
Justice produces wealth. Any attempt to discover economic laws of wealth based on a detailed search of economic statistics reverses the Bible’s concept of moral cause and economic effect. It places economic causation above moral causation in the wealth of nations.
1. Adam Smith’s Ethical Legacy
Adam Smith understood this; his disciples rarely have. Before he wrote An Inquiry into the Nature and Causes of the Wealth of Nations (1776), he wrote The Theory of Moral Sentiments (1759). His moderate deism was a desiccated version of the covenantal Presbyterianism of his Scottish peers. His contractualism was a man-centered version of their covenantalism. His orderly world of economic causation rested on moral cause and effect in history. The seeming autonomy of his economic theory from morality, and of his morality from theology, is an illusion. Smith’s epistemology moved in the direction of autonomy, no doubt, but his economic theory was not an exercise in value-free methodology. He recognized that an economy is grounded in moral causation, for society rests on justice. He wrote this in The Theory of Moral Sentiments: “Society may subsist, though not in the most comfortable state, without beneficence; but the prevalence of injustice must utterly destroy it.” Social order is not the product of immoral behavior, however profitable vice may be in the short run. “Vice is always capricious—virtue only is regular and orderly.” Self-interest that is devoid of love of one’s neighbor cannot build a civilization. “As to love our neighbour as we love ourselves is the great law of Christianity, so it is the great precept of nature that we love ourselves only as we love our neighbour, or, what amounts to the same thing, as our neighbour is capable of loving us.” Smith did not pursue this ethical theme in The Wealth of Nations. The doctrine of ethics is not part of its methodological framework. His disciples have ignored his instruction on justice as systematically as Isaac Newton’s disciples have ignored his view of God, creation, and providence.
Evaluating God’s favor to a society by an appeal to numerical measures is valid. But this evaluation must always be governed by the economist’s qualification: “other things being constant.” The “other things” in this case are ethical. Ethics comes first. For most people, it is better for them to be middle class than wealthy. Why? Because of the ethical temptations associated with great wealth. “Put vanity and lies far away from me. Give me neither poverty nor riches, just give me the food I need. For if I have too much, I might deny you and say, ‘Who is the Lord?’ Or if I become poor, I might steal and profane the name of my God” (Proverbs 30:8–9). [North, Proverbs, ch. 85] If a person’s ethical status could be ensured irrespective of wealth, then more would always be better than less. But it is inherent in the covenantal structure of a fallen world that wealth and ethics are intertwined. Smith understood this. He wrote in The Theory of Moral Sentiments: “The virtue of frugality lies in a middle between avarice and profusion, of which the one consists in an excess, the other in a defect, of the proper attention to the objects of self-interest.” He lauded frugality in the name of capital formation, but not frugality to the point of greed. He praised spending by the wealthy as a source of benefit for workers, but not to the point of wasting one’s inheritance.
Here is where biblical imputation becomes difficult. On the one hand, wealth is designed to confirm the national covenant. “But you will call to mind the Lord your God, for it is he who gives you the power to get wealth; that he may establish his covenant that he swore to your fathers, as it is today” (Deuteronomy 8:18). But it can just as easily undermine the covenant: “But you may say in your heart, ‘My power and the might of my hand acquired all this wealth’” (Deuteronomy 8:17). The same numerical sanction—wealth—can become a means of grace or a means of wrath. A person’s covenantal status determines which effect wealth has in his life. The trouble is, we are not always sure about what our covenantal status is, nor are we sure what it will become under different economic conditions. This is why the author of the Proverbs prayed for middling wealth. It is safer. In genetics, this tendency is called “regression to the mean.” This was discovered by Francis Galton, Darwin’s cousin.
2. Regression to the Mean vs. Pareto’s Law
In his book, Against the Odds: The Remarkable Story of Risk (1996), Peter Bernstein wrote that regression to the mean has applied to every system we have discovered. He exaggerated. There are many systems in which another phenomenon operates: Vilfredo Pareto’s 20-80 law.
Pareto, an Italian sociologist-economist who taught economics in Switzerland in the late nineteenth century, made detailed investigations of the distribution of income in European nations. He discovered an amazing fact: the slope of the income curve, from the richest to the poorest members of society, was similar in every nation that he studied. The richest 20% owned most of a nation’s wealth: 80%. This statistical relationship, first published in 1897, has not changed significantly over the last century, irrespective of the economic policies of individual industrial nations. This statistical relationship has come to be known as the Pareto law or the Pareto rule or the 20-80 rule. A 20-80 distribution has been found to apply in social institution after institution, as well as in their diverse operations. No one seems to know why. Josef Steindl wrote in 1965: “For a very long time, the Pareto law has lumbered the economic scene like an erratic block on the landscape; an empirical law which nobody can explain.” I would like to say that I have an answer to this seemingly irreconcilable question regarding 20-80. The phenomenon exists. Why does it exist? Why doesn’t regression to the mean eliminate it? I do not have an explanation. Pareto offered a famous sociological theory: circulating elites. He argued that the same families or social groups will not be found in the top 20%, generation after generation. Over long periods of time, this appears to be true, but it is not easy to prove. Statistics do not prove it in the way that they validate wealth distribution. The theory is consistent with the hierarchical aspect of the biblical covenant. Why does the distribution of income remain skewed, despite either government intervention or free market competition? We do not know.
3. Covenantal Blessings
Here is what Christians do know: God is sovereign over the poor. He raises them up—not all of them, but some of them. “The Lord makes some people poor and some rich. He humbles, but he also lifts up. He raises up the poor out of the dust. He lifts the needy from the ash heap to make them sit with princes and inherit the seat of honor. For the pillars of the earth are the Lord’s and he has set the world upon them” (I Samuel 2:7–8). [North, Historical Books, ch. 12] God can intervene in history to break the cycle of poverty as surely as He breaks the cycle of wealth. But is there a cycle of poverty? Is there a cycle of wealth? Do the rich get richer and the poor get poorer, “other things remaining constant”? This is another way of asking: “Is God capricious? Does He raise up some and cast down others for no particular reason?” Deuteronomy 28 denies this. God has established a structure of economic order. First, there are not many extremely poor people in a covenant-keeping society. “I was young and now am old; I have never seen the righteous person abandoned or his children begging for bread” (Psalm 37:25). [North, Psalms, ch. 6] Second, there are not many rich people. Capital is hard to earn and harder to retain unless the state intervenes to protect existing holders of capital from new sources of competition. If a state does this, then its national economy eventually falls behind free market societies that refuse to grant such coercive protection to special-interest groups.
If a society is getting richer than its rivals, the poor people inside this society may become richer than the middle class are in another society. Can this lead be maintained indefinitely? To answer this question, I begin with a statistical observation: the effects of long-term economic growth are cumulative. A small rate of growth, if compounded, creates huge effects over centuries. A slightly higher rate of growth, if maintained, creates huge disparities of wealth between nations over centuries. But huge disparities of anything within a system call forth the counter-effects: either regression to the mean (which does not seem to govern wealth distribution) or the circulation of elites (which does seem to operate in income distribution). If innovators in one nation have a competitive lead, imitators in other nations will be tempted to imitate the success of the first nation’s innovators, assuming that the sources of their advantage become known, which is almost always the case. New production techniques are difficult to conceal in a digital era. There is great personal economic incentive for outsiders to discover and appropriate these secrets.
Can God’s covenantal blessings be maintained indefinitely? To answer this question, we must not appeal to the Old Covenant’s category of original sin. The familiar Genesis pattern of creation, fall, and redemption appeared continually in the Old Covenant, but the New Covenant has broken that pattern by means of the death, resurrection, and ascension of Jesus Christ. The possibility of sustained confession and sustained economic growth does exist as a theoretical ideal. The history of the West after 1800 has demonstrated this possibility. Men have discovered the secrets of widespread wealth: property rights, individual freedom, enforceable contracts, future-orientation, the moral acceptance of wealth, capital accumulation, and technology. Great Britain and its North American colonies discovered these secrets first. The United States replaced Great Britain as the world’s engine of growth early in the twentieth century. Parts of Asia have begun to grow rapidly at the beginning of the twenty-first.
A nation’s citizens are subject to the lure of autonomy: “My power and the might of my hand acquired all this wealth.” A nation can lose its position of leadership. Historically, every leading nation has. But the New Covenant has overcome original sin in a fundamental way. It has made possible the Mosaic law’s ideal of long-term compound growth. It has given mankind a new eschatology, one which is no longer trapped by the cyclical history outlook of the pagan world. Linear history—creation, fall, redemption, kingdom extension, and final judgment—can be applied to nations and societies. Society is not organic. It does not parallel biology: birth, growth, decline, death. Society is covenantal: confession, obedience/disobedience, sanctions, inheritance/disinheritance.
There is no bell-shaped distribution of wealth within a society. A minority of about 20% of the population owns about 80% of the capital. But there is change in who occupies the top positions, although this may take generations. The Bible says that at one end of the income distribution curve, the rich man is tempted to forget God. If he succumbs, he loses his wealth, or his heirs forget to honor the moral basis of wealth-creation. They dissipate their inheritance. The process of inheritance rewards the righteous. At the other end of the curve, the poor man who steals is eventually caught and sold into bondage under a successful person. His victim receives payment; he receives training; his buyer receives a stream of labor services. If the servant is successful and buys his way out of bondage, he re-enters society as a disciplined man, and presumably a self-disciplined man. He accumulates wealth.
Can a family maintain its advantage? No more than a society can. Then what about society? It is possible for a covenantally faithful society to retain its advanced position until such time as: (1) it succumbs to the temptation of autonomy; (2) other nations imitate it and become even more faithful. On the one hand, sin can undermine a society by pulling it back into comparative poverty. On the other hand, the gospel can spread, bringing other nations into the growth mode. The deciding factor here is grace, not statistics. Nations rise and fall, or else get overtaken, but none can maintain a permanent lead apart from its continued lead in ethical sanctification.
The visible outcome of covenant-keeping is external blessing. This theme is basic to the Pentateuch. I argue that it is basic to the entire Bible. My argument is not taken seriously by Christian commentators and Christian social theorists. They argue that there has been a great discontinuity between the Old Covenant and the New Covenant. This discontinuity supposedly has broken the predictability of God’s visible responses in history to man’s obedience or disobedience. But if there has been a great discontinuity, then what has happened to the evangelism aspect of Bible-revealed law? “Look, I have taught you laws and decrees, as the Lord my God had commanded me, that you should do so in the midst of the land which you are going into in order to possess it. Therefore keep them and do them; for this is your wisdom and your understanding in the sight of the peoples who will hear about all these statutes and say, ‘Surely this great nation is a wise and understanding people.’ For what other great nation is there that has a god so near to them, as the Lord our God is whenever we call upon him? What other great nation is there that has laws and decrees so righteous as all this law that I am setting before you today?" (Deuteronomy 4:5–8). [North, Deuteronomy, ch. 8]
Moses was repeating what he had announced in Deuteronomy 6. “Now these are the commandments, statutes, and decrees that the Lord your God has commanded me to teach you, so that you might keep them in the land that you are going over the Jordan to possess; so that you might honor the Lord your God, so as to keep all his statutes and commandments that I am commanding you—you, your sons, and your sons' sons, all the days of your lives, so that your days may be prolonged. Therefore listen to them, Israel, and keep them, so that it may go well with you, so that you may greatly multiply, in a land flowing with milk and honey, as the Lord, the God of your fathers, has promised you would do” (Deuteronomy 6:1–3). This is the basis of the wealth of nations, which means increasing wealth per capita in a growing population sufficient to fill the earth to complete the dominion covenant. [North, Deuteronomy, ch. 14]
Has the ethical cause-and-effect social and economic system of the Mosaic law been annulled by God? Are the differences between covenant-keeping nations and covenant-breaking nations no longer visible to covenant-breakers? Has God annulled this judicial tool of evangelism in the New Covenant, an era which is generally regarded by Christians as the great era of evangelism, i.e., the Great Commission ? [North, Matthew, ch. 48] The critics of biblical law assume that this is the case, but they rarely say so publicly. This implication of their hostility to biblical law is just too embarrassing.
Under the Mosaic covenant, covenant-breakers could see that the outcome of covenant-keeping was superior to other outcomes. This realization was designed by God to call forth the confession of Deuteronomy 4. But Christians today assume that, under the New Covenant, this older relationship between national obedience and national wealth is gone. The objective testimony that God gave to covenant-breakers through Israel under the Old Covenant supposedly no longer exists. The arrival of the New Covenant has supposedly left modern man with less excuse. Under the Old Covenant, foreigners and resident aliens could see that Israel’s law-order was superior. Under the New Covenant, they supposedly cannot see this, because no nation possesses or can ever possess any such covenantal law-order. No such law-order exists, we are told. Here is my summary of the inescapable conclusion of such a view of God’s law. “Under the Mosaic law, covenant-breakers possessed greater clarity in recognizing the external blessings of the covenant, and therefore they had greater responsibility for rejecting the covenant than they have today.” This strange theory of covenantal responsibility is implicitly held by the vast majority of Christians today. We are asked to believe that the New Covenant has left covenant-breaking men with more excuse for their rebellion, because the clear covenantal categories of the Old Covenant have been superseded by a less clear covenantal order.
The antinomian critic seeks to evade this inescapable implication of his position by arguing that the Holy Spirit’s presence in the New Covenant has more than offset the supposed loss of clarity regarding ethical cause and effect. The theological temptation here—one that is widely succumbed to—is to believe that some form of antinomian mysticism has replaced judicial theology. An antinomian doctrine of the Holy Spirit has replaced the objective testimony taught by Deuteronomy 28. Against this view, I argue that a theory of the regressive covenants—greater personal responsibility for covenant-breakers today despite reduced objective testimony—is incorrect. Antinomian mysticism is also incorrect. There is progress in covenantal history. Theological contrasts get clearer over time, not more muddled. The death, resurrection, and ascension of Jesus Christ in history have made the Great Commission possible (Matthew 28:18–20). The sending of the Holy Spirit has granted to God’s people greater understanding than Old Covenant saints possessed.
Christian social theory rests on a premise: the continuing authority of this announcement. “Do not forget him who led you through the great and terrifying wilderness, with its fiery serpents and scorpions and thirsty ground where there was no water, who brought you water out of the rock of flint. He fed you in the wilderness with manna that your ancestors had never known, so that he might humble you and test you, to do you good in the end, but you may say in your heart, ‘My power and the might of my hand acquired all this wealth.’ But you will call to mind the Lord your God, for it is he who gives you the power to get wealth; that he may establish his covenant that he swore to your fathers, as it is today” (Deuteronomy 8:15–18). External blessings were confirmations of God’s covenantal social order. If this system of confirmation is no longer true under the New Covenant, then there cannot be any uniquely biblical Christian social theory. This includes economic theory. Christians must therefore pick and choose among non-Christian theories of social causation. There could be no Christian economics, no Christian political theory, no Christian sociology, and no Christian social theory. There can only be various kinds of baptized humanism. If you do not like this conclusion, then you will have to reconstruct Christian social theory in terms of some other principle that is revealed in the Bible. This will not be an easy task. Remember: you can’t beat something with nothing.
There are limits to growth. This is another way of saying that there is scarcity. There was scarcity before the fall: finitude. The dominion covenant is God’s assignment to mankind to overcome these limits progressively. This is not a program for man’s ultimate divinization. Rather, it is a call to eternal service. The dominion covenant is eternal. It is above all a call to greater knowledge: greater knowledge of God’s creation and greater knowledge of God. God is infinite. There will always be more for men to learn. There is also cursed scarcity, which was God’s response to man’s rebellion (Genesis 3:17–19). [North, Genesis, ch. 12] Men are required to overcome this scarcity. But, the Bible teaches, it takes redemption to achieve this long term. It takes special grace.
Humanistic economic analysis usually begins with scarcity. Economists generally favor economic growth because it presses against the limits of scarcity. Economists claim to be morally neutral, but when it comes to the issue of economic growth, there is widespread agreement that this is a legitimate goal of government economic policy. Economic growth is regarded as a good thing, both morally and institutionally. On this point, Christian economic theory agrees with humanistic economic theory.
For a biblical standpoint, economic growth as a goal in and of itself is the religion of mammon: “more for me in history.” It presumes that man is autonomous. Man seeks his own goals. He answers neither to God nor nature. The ecology movement is a reaction against this outlook, but it has had little impact on the thinking of most economists. The correct biblical response is this: economic growth is a blessing in response to men’s covenantal faithfulness. This means honoring God’s laws. The modern world has come closer to honoring God’s economic laws than at any time in the past. Private property, future-orientation, capital accumulation, free trade, equality before the law, few or no price controls, and other aspects of biblical economics have been adopted by Western economists, Western governments, and a growing number of Western intellectuals. This outlook spread to parts of Asia after World War II. This is an aspect of common grace.
The most remarkable aspect of economic growth has been the decline in the cost of information. Nothing on this scale has happened in the history of man. The cost of information continues to fall at a rapid rate. The first major breakthrough was in 1844 with the commercial development of the telegraph. This overcame the limitation of space as never before. Continual improvements in telecommunications since 1844 have revolutionized the world. The development of punch cards in the late nineteenth century was another breakthrough: computerization. The vacuum tube increased the impact of telecommunications through radio, and it also increased the speed of computer calculations in computers, beginning in 1945: Eniac. Then came the invention of the transistor in 1947, the integrated circuit computer chip in 1959, and microcomputers in the late 1970s. The World Wide Web appeared in the mid-1990s. A decade later came the smartphone. All of this has continued to lower the cost of information. The primary breakthroughs in overcoming the limits of scarcity, accelerating after 1900, have been the result of the reduction in the cost of knowledge. Here, physical limitations are far less restrictive. The major physical limitations are the speed of light and heat.
There is a debate among economists regarding the most effective government policies to achieve economic growth, but ever since the fall of the Soviet Union in 1991, Western intellectuals have favored free markets, free trade, and the right of contract. Keynesian economists believe that governments should run deficits in times of recession, and they also believe that central banks should increase the digital money supply. They believe in some degree of central planning. They do not believe that economic growth can be attained exclusively by the free market’s decentralized economic planning.
The spread of free-market capitalism across the face of the earth has now begun to offer this hope: the elimination of starvation-level poverty by 2060. If someone should read this forecast in the early twenty-second century, it will seem conventional, but nothing like this was forecasted by anybody in 1975. There has been an acceleration of worldwide economic growth, and this has been accompanied by a transformation of economic thinking away from socialism.
This increase in per capita economic growth has been accomplished primarily by a reduction in the costs of production. This process began sometime around 1750, and it accelerated after 1800. This has transformed the world. Except for the decade of the 1930s, the consistent increase in per capita wealth of at least 2% per annum in the West has created a new civilization.
It would be convenient if economic historians were in agreement on exactly what it was that led to this enormous expansion of per capita wealth. But such is not the case. Prof. Deidre McCloskey has analyzed three dozen different explanations offered by economic historians, and has showed why none of them is persuasive. The title of McCloskey’s book is compelling: Bourgeois Dignity: Why Economics Can't Explain the Modern World (2010). McCloskey thinks the primary change was a change in rhetoric which favored entrepreneurship and wealth. We need a scholarly book to provide the historical evidence for this thesis. The third volume of McCloskey’s trilogy did not succeed in proving this. It offered no evaluation of the sources of this rhetorical shift before 1700: sermons and theological treatises. In a theological era, these were the sources of rhetoric that either confirmed or changed most people’s minds.
The historian always should begin with the five W’s: what, where, when, who, and why? Then he must ask the sixth question: how? When did compound per capita economic growth begin? This was no later than 1800. But there had been no major change in rhetoric in the years leading up to the economic transformation. Anywhere else? One obvious candidate is the Netherlands in the late sixteenth and seventeenth centuries. Next, who were the sources of the change of rhetoric? The major sources of opinion would have been pastors. These were divided between Calvinists and Arminians. Did their sermon messages change? Did this change in outlook regarding entrepreneurship and wealth get into the theological textbooks of the era? Was there any aspect of theology that changed, thereby making a new attitude toward wealth more acceptable? There was one change: eschatology. The seventeenth century was the birth time of postmillennialism. A new optimism regarding historical progress came into being. There were postmillennial theologians in the Netherlands in this century. Did they preach such sermons relating historical optimism in entrepreneurship? We do not know. If they did preach the sermons, what effects did this have on capital creation, exploration, and business? We do not know. “Why” is easy to answer: to get rich. Then there is “how?” What did the Dutch do that made growth possible? Increased thrift? Increased innovation? All of these questions would then have to be applied to Scotland and England.
Because compound economic since 1800 has transformed the world far more than any other social force in history, I regard the question of its origin as the most important question that a historian can ask and then answer. It would certainly be nice to have a plausible answer that is not seriously undermined by the facts.
Free-market capitalism has produced increasing per capita output, and therefore increased per capita income, ever since 1800. From the end of the Napoleonic wars in 1815 until the outbreak of World War I in 1914, consumer prices in the West were either stable or falling. This was the era of the international gold coin standard. There was some monetary inflation because of fractional reserve banking in some nations, so the money supply was not stable, but it increased very little in most Western nations. The main exception was the United States during the Civil War (1861–65), which is a time of rampant monetary inflation, especially in the Confederacy.
1. Rising Output
Rising output means rising income. As income rises, people have a greater number of choices than they would have had if their income had not risen. This is the best way to define economic growth: an increased number of choices. Additional choices increase individual freedom. They also increase personal responsibility. This is the essence of the dominion covenant. Men are to exercise greater responsibility in the administration of the capital that God has allocated to them in their capacity as legal trustees and economic stewards.
It has been common throughout history to visualize economic growth in terms of the ownership of an increasing number of physical consumer goods. People think of greater wealth as enabling them to buy larger homes. Biblically, this goes back to King David, who built himself a palace (II Samuel 7). In modern times, most people still think of greater wealth in terms of large homes in nice neighborhoods, owning upscale cars, having nicer furniture, having the latest labor-saving devices, and so forth. People no longer think of wealth as having a large number of servants in the household. That concept of economic growth ended in the West after World War I. Today, the very rich do maintain large estates with full-time servants, but they do so invisibly. The general public does not see these estates, which are surrounded by large land holdings. Extremely wealthy people prefer anonymity except on special occasions at fund-raising charity events attended only by the very rich. This lifestyle involves separation from the general public. They share this preference with celebrities, who do not seek anonymity, but who seek separation from photographers and fans.
In the United States, wealthy people also seek invisibility. They do so by living in upscale neighborhoods, but not in the isolated enclaves of the superrich. They have no consumer debt. They do not drive the latest expensive car. They may not own the largest home in the neighborhood. There is a phenomenon in the United States called “the millionaire next door.” Their neighbors do not know anything about their net worth.
This indicates that individuals have different subjective standards of what constitutes success and therefore what constitutes a successful lifestyle. Objective wealth in the form of net monetary worth produces different subjective evaluations regarding the proper display of wealth.
Another form of wealth is leisure time. Leisure time means time that is not devoted to making money or giving it away. The problem with leisure time is this: the richer that someone is, the more valuable is his time. He is probably an entrepreneur. Every spare hour becomes more valuable. Relatively few rich people who are founders of great enterprises indulge in leisure. Children who inherit large fortunes are far more likely to indulge in leisure. They are not economically productive. Their income from their inheritance is so high that not working for a living does not cost them anything in forfeited lifestyle. This is why one of the richest men in the world, stock market investor Warren Buffett, once made this statement regarding his children: “I want to leave them enough money so that they can do anything, but not so much that they can do nothing.” It is a wise aphorism. Nevertheless, in 2012, he gave each of his three children $600 million in shares, so he did not adhere to his aphorism. How much was $600 million? By comparison, the median family income in 2012 was about $50,000 per year. Buffett was worth over $85 billion in 2019. He still ran his company at age 88. There was still very little leisure time in his life.
Because of research by psychologists and economists in the subdiscipline known as behavioral economics, academic economists have learned of the phenomena known as the hedonic ratchet. As personal wealth increases, the subjective exhilaration of this new wealth lasts for a period of time, but within a year or two, the level of happiness and satisfaction with life reverts to what it had been before the individual gained this increased wealth and income. This is not true of extremely poor people who become lower-middle class. They remain much happier with their condition than they were before. Above this level, the hedonic ratchet phenomenon begins. This was not a new discovery. The book of Ecclesiastes talks about this phenomenon. Establishment economic theory has ignored this phenomenon because it has no way of accounting for taste. Subjective tastes change as people get richer, but their subjective sense of satisfaction is much less likely to change on a permanent basis. None of this fits into the equations and graphs of establishment economic theory.
One cause of the hedonic ratchet is the inescapable increase in personal responsibility that accompanies an increase in wealth. This is not discussed by behavioral economists. If an individual had sought increased wealth on the assumption that he would not suffer from the burdens associated with increased responsibility, he learns that he had been incorrect after he achieves his goal. In contrast, if this person sought increased responsibility from the beginning, and his success resulted in increased wealth, then his sense of satisfaction is far more likely to become permanent. Yet, even in this case, there may be the desire to increase responsibility even more. We might call this the responsibility ratchet. There is no permanent sense of satisfaction. The high achiever has even more to prove. This is the curse of dominion for those who do not see themselves as stewards of God. If they see themselves as God’s stewards, they should not resent increased responsibility. They should seek more responsibility only if they think they can be of greater service to God by serving men. They should see themselves as finite creatures under God. They should understand that increased responsibility is the proper long-term goal of greater wealth. This is made clear in the parable of the successful stewards in the Gospel of Luke. They are placed in charge of cities (Luke 19:17). Their responsibility increases dramatically. This is seen in the Bible as a blessing, not a curse.
2. Falling Prices
It is widely believed among Keynesian economists and analysts that economic growth is accompanied by rising prices. This is why Keynesians are not concerned with slowly rising prices. They think this is not only normal but normative: the inescapable cost of economic growth. The Keynesians are incorrect on all counts. Falling prices can accompany economic growth, and will accompany it in an economy in which there is monetary stability. As entrepreneurs bring an increasing number of goods and services to the marketplace, they must persuade buyers to change their spending plans. The main way that they can do this is by lowering prices. This is why consumers have rising real incomes. Their rising incomes are the result of the lower prices that they pay for the choices at their disposal. In societies in which civil governments and central banks do not expand the money supply, a falling price level is normal. This is what the United States had from 1879, with the restoration of the gold coin standard, which had been suspended during the Civil War (1861–65), until the creation of the Federal Reserve System, which began operations in 1914. It was a time of rapidly expanding economic output, and it was also a time of falling prices for consumer goods and services.
Keynesians believe that economic growth is the result of increasing consumer demand. Keynesianism is a system of demand-side economics. Keynesians do not explain rising consumer demand exclusively in terms of rising productivity. They explain it also in terms of a redistribution of wealth: rising government debt (which means the removal of investment capital from the private sector, which they never mention) that funds rising government spending and therefore rising employment and consumer spending. In opposition to this outlook is free market economic theory, which is supply-side theory. It insists that greater productivity is attained by rising per capita investment in capital goods. This increased output enables people to increase their demand for goods and services. This outlook goes back to the economist J. B. Say in the early 1800s, whose views were anathema to Keynes. As production increases, producers lower their prices in order to extend their products’ market share. This rising productivity is what creates wealth for the masses. By lowering their prices, producers seek new consumers who would not have been able to afford to purchase this new output under older conditions.
When we think of rising output in terms of falling prices, this should remind us of the curse of the ground in Genesis 3. By increasing output, men overcome the limits imposed by the curse of the ground. The thorns and weeds that God introduced as a way to make it more difficult for men to earn their daily bread are being overcome by modern technology. This is literally the case in modern agriculture, which is capital intensive and labor efficient. This is the model for economic growth in general. The curse increased the costs of production. Therefore, overcoming the curse has to do with decreased costs of production. These decreased costs of production lead to decreased prices of consumer goods. Competition forces producers to lower their prices. Entrepreneurs find ways of producing goods and services less expensively. This initially produces high profits. But rival entrepreneurs imitate the new production techniques, and they offer their goods and services at prices lower than the innovator offered initially. (This assumes that the innovator did not initially lower his prices in order to secure a larger market share for his output and then keep it: Henry Ford’s strategy for the Model T.) Capitalism lowers the cost of production and therefore also lowers the price of goods and services. If the money supply is not increased, the price level steadily falls.
Under a gold coin standard and free banking, where bankers could demand payment in gold from other banks, the money supply was relatively stable. Economic output increased, and prices fell.
The dominion covenant mandates increased productivity. It is only through increased productivity that mankind can subdue the earth. Increased productivity overcomes the scarcity imposed by finitude, and it also overcomes the scarcity imposed by the curse of the ground. This is why economic growth is not simply a benefit. It is a moral imperative. It is a covenantal imperative. This confession is basic to Christian economic theory. While humanistic economic theory does proclaim the benefits of economic growth and the legitimacy of economic growth, it does not see economic growth as a moral imperative.
There is no known limit to economic growth. But there is a temporal limit to economic growth in history. The final judgment will separate covenant-breakers from covenant-keepers. The accumulated capital, including knowledge, of covenant-breakers will then be transferred to covenant keepers, which they will use as the capital base in the post-resurrection new heaven and new earth. The wealth of the sinner is laid up for the just (Proverbs 13:22). [North, Proverbs, ch. 41]
Economic growth is part of God’s covenantal administration. The blessings of God are the results of obedience to the laws of God. The enormous economic growth that has taken place since 1800 is an outcome of greater adherence to the Bible’s laws of private property, future-orientation, respect for contracts, honest weights and measures, thrift, and personal responsibility.
The failure of Communist China’s economy and the Soviet Union’s economy stand as monuments to the failure of covenant-breaking man’s attempt to substitute a rival worldview that favored the power of state central planning and the suppression of private property and free market transactions. Marx was in self-conscious rebellion against the Christianity of his youth. He substituted a religion of revolution for the religion of Christian redemption. I wrote about this in 1968 in my book, Marx’s Religion of Revolution. The visible, statistically measurable failure of the various Communist experiments was a major setback to the worship of the state and the state-planned economy. There never were many Marxist economists, and there are fewer today than ever. Marxism was a chaotic, illogical economic system, and almost no one takes it seriously today.
It is therefore possible to make evaluations in terms of objective economic standards. There are ways of measuring economic growth. There are also ways of measuring economic contraction. The great debate among economists today centers on which system of economic theory, which system of economic sanctions, which system of civil government will produce the greatest economic growth. Economic growth has become the acceptable test of humanistic economic theory. Moses proclaimed economic growth and prosperity as legitimate indicators of the reliability of the covenant that God made with Israel. Christian economic theory should adopt Moses’ recommendation. Christian economic theory should examine the Mosaic law in detail in order to discover the foundations of economic theory which, when adopted by societies, will lead to permanent economic growth.
In the biblical framework, economic growth is not an end. It is a tool. Economic growth points to a temporal end of time, when the final distribution of property will take place. We read about this in the parable of the talents, which is immediately followed by a description of the final judgment. There will be winners and losers in history. This will be marked by their success in entrepreneurship in building up personal wealth. Any philosophy that denies this is inherently anti-Christian. Any economic worldview that denies this is inherently anti-Christian.
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The complete manuscript is here: https://www.garynorth.com/public/department196.cfm