Updated: 4/13/20
The words of wise people are like goads. Like nails driven deeply are the words of the masters in collections of their proverbs, which are taught by one shepherd. My son, be aware of something more: the making of many books, which has no end and much study brings weariness to the body (Ecclesiastes 12:11–12).
This book is the culmination of six decades of study. It is based on 31 volumes of verse-by-verse exegesis of Bible passages relating to economic theory and practice. I wrote an additional ten volumes on applications of biblical economic principles. I have lost track of the number of articles, but it is in the hundreds.
I have now come to a point where I must summarize what I have found in 17 brief phrases. My work confirms the insights of Ecclesiastes. Of the making of books, there is no end. Yet this book constitutes something of an end. I do not expect to make any major economic discoveries in the future. I do not expect to have to rewrite this book. I surely hope I do not have to re-index it.
I would like to have produced this summary of what I have learned about economics in ten rules. That would be convenient. There will be one rule for each digit on each hand. But such was not the case. You will have to get seven toes involved.
I am encouraging you to begin writing your share of books. Perhaps one of these phrases will catch your attention. Perhaps you will write a book on one of them. Even if you do not intend to do any writing, you would be wise to commit them to memory, along with a few of the insights that I offer to explain the importance of these phrases. If you understand these principles, and if you apply them in your writing, lecturing, and thinking, you will be in a position to help others wrap their minds around the basics of economics.
In Chapter 2, I summarized the covenantal structure of Christian economics. Those points also deserve to be memorized. But these 17 have to do with economic theory in general. These are principles that are recognized by most people who call themselves free-market economists. If you can relate what you have read in this book to these brief phrases, then you really do understand Christian economics. If you can discuss these principles with another economist, and you can show how these principles are implications of biblical economic principles, then you possess the analytic tools of not only Christian economics, but of economic theory in general. You do not need any graphs. You do not need any equations. You just need a working understanding of these phrases as they apply to economic theory in general, but also as they apply to Christian economic theory.
I could have used this chapter in 1960 when I began this investigation of Christian economics. It would have enabled me to focus my study. I would not have had to start from scratch. You will not have to start from scratch.
I have called these economic laws. The question will arise: “Are these really economic laws?” Yes, they are. They are causal relationships that are sufficiently universal and sufficiently predictable that everyone would be wise to acknowledge their existence and also conform his thinking and his behavior to these laws. They are not laws in the sense that gravity is a law, but they are surely more understandable than gravity. Gravity is unexplainable. Why there is a connection between the planets and the sun, or between the sun and the Milky Way, or between the Milky Way and the other galaxies, remains unexplained. Attraction at a distance makes no sense—not across the room or across the galaxy. The mathematical rigor of the law of gravity is great, but it makes no sense. In contrast, the laws of economics make sense, but there is no mathematical rigor associated with them. In fact, the use of mathematics to explain them leads to conceptual errors.
These laws are laws in this sense: if you violate them, you will suffer negative consequences. Conversely, if you honor them in your thoughts and behavior, you will reap rewards. They are part of a system of sanctions that was divinely created and is divinely enforced. Humanistic economists do not believe this, but that is not your problem or mine.
I regard these as analytical principles. Analytical principles structure the technical details of economic theory. They are rules that enable economists to understand causation. They are not merely general principles. A general principle is this one: God owns everything. This is the judicial foundation of Christian economics. But I see no way to invoke this general principle as an analytical proposition that can be used to understand economic causation. The dominion covenant rests on the cosmic economic principle that God owns everything because He created everything. But that which makes the dominion covenant analytically relevant as an economic proposition is God’s continuing delegation of authority to mankind, which establishes man’s responsibility. This leads to my first economic law.
Christian economic theory must always begin with God’s ownership. The fundamental principle of Christian economic theory is that God owns the world because He created it (Psalm 24:1–2). He has delegated limited ownership to mankind (Genesis 1:26–28). Each individual is therefore responsible to God for the proper administration of his share of God’s assets. God will hold him accountable on the day of judgment for the administration of these assets. The parable of the talents (Matthew 25:30–41) and the parable of the minas (Luke 19:11–27) make this clear.
The essence of ownership is legal responsibility for the administration of whatever is owned. Ownership is always a form of trusteeship. Men are legal agents for God with respect to the assets they possess, including their skills, talents, and vision of the future. Society recognizes this arrangement by making owners responsible for the negative effects that their property imposes on other people. Civil governments acknowledge this. Social mores acknowledge this. Society brings negative sanctions against people who misuse their property by physically harming other individuals. There is no such thing as ownership devoid of responsibility.
One implication of this economic law is the inescapable fact that as someone gets richer, his responsibility necessarily increases. This is a cost of ownership. This is an inescapable aspect of the dominion covenant. People who seek wealth do not always understand that if they become successful, they will find themselves burdened with responsibilities that they had not considered. They may consider these legal burdens as negative sanctions. But these legal burdens are not supposed to be negative sanctions. They are positive sanctions. The biblical view of ownership is that men can legitimately pursue greater wealth, but only because they see themselves as stewards of God’s property. The mandated program of success in the New Testament’s framework of authority is service to others (Luke 21:25–28). There is service upward to God, outward to consumers, and downward toward those who are under our jurisdiction. Then, finally, there is service to ourselves. Anyone who is unwilling to accept this burden of service is unwise to pursue greater wealth. On the other hand, if someone wishes to become a better servant, then he should pursue greater wealth. Wealth in the biblical framework is a tool of service. God increases our wealth when we have proven to be good servants, meaning good stewards of His property.
Most free-market economists see ownership as a social function: service to consumers. The owner administers property on behalf of others: a stewardship function. Non-owners impute economic value to this property. They bid for it. This is why it has a price. The owner must decide whose purposes his property should satisfy. Should he sell his property or rent it to the highest monetary bidder? Should he use it himself? Should he give it to a charity? He has to decide. He is legally responsible for making this decision. He is also economically responsible for making this decision. Free-market economics correctly identifies this social function of ownership, even though it does not understand the covenantal framework of both ownership and social service.
If you do not possess the legal authority to sell something, you do not own it. From a theoretical standpoint, the right to sell something is the best economic definition of ownership. It is also a highly practical definition of ownership.
If someone owns something, he is entitled to reap the benefits of ownership. But he is also liable for the responsibilities of ownership. He may decide that the benefits associated with transferring ownership are greater than the benefits of maintaining ownership. He therefore seeks another person to take this responsibility. He would like to get a high price for whatever it is he is selling. He would like to make a profit on the transaction. The primary task, biblically speaking, for an owner is to decide whether or not he is equipped to bear the responsibility of ownership. He should sell or not sell after having made this assessment. Responsibility is primary; profitability is secondary. This is why the subjective economic imputation of value is an aspect of exercising judgment. So is the subjective assessment of the degree of personal responsibility associated with maintaining ownership. They are both aspects of point four of the biblical covenant: judgment.
We are supposed to increase our skills as judges before God. This has to do with the application of biblical law and biblical morality to specific situations. This used to be called casuistry. That term has gone out of fashion. It was a theological term. But it should also be a general judicial term. It should be an economic term. The skill of evaluating the importance of property and opportunities for building the kingdom of God is an ethical skill, but it is also a judicial skill. It has economic implications.
Men focus on the economic return associated with a particular action. This focus is a mistake. The focus should be on the degree of responsibility of ownership vs. the transfer of ownership. To sell something is to transfer the responsibility of ownership to someone else. There are economic costs associated with transferring ownership. There are also economic costs associated with maintaining ownership. This is why Jesus told his disciples to count the costs (Luke 14:28–32).
Should you sell what you own and give to the poor? Should you keep what you own, find buyers for the output of what you own, and then hire workers to help you convert what you own into consumer-benefitting products? Should you be a donor or an employer? You can give something away to help the poor, or you can provide employment for helping the poor. Which should it be? Which is best for the extension of the kingdom of God? Which will make you more money? If you decide to use your capital to produce a product, and you then discover that consumers do not want to buy what you have offered for sale, you will lose money. You will also have lost the time you spent trying to get rich. It would have been a lot easier to have given away your property to the poor. You must exercise judgment in making this decision. You must impute economic value in making this decision. You must act as a trustee in the name of God and a steward on behalf of God in making this decision.
The system of private property established by the Bible necessarily involves the legal right of contract. If you own something, you have the legal authority to transfer this ownership. The civil government should enforce the terms of this contract if there is ever a privately irreconcilable legal dispute about the meaning of these terms.
Another implication is this: the idea that government ownership of property is a form of common ownership is incorrect. If you cannot sell your share of this common ownership, then you do not own it.
Among free-market economists, there is a popular phrase: “There is no such thing as a free lunch.” A variation of this phrase is this: “You can’t get something for nothing.” Both of these phrases rest on a concept of scarcity. Scarcity is best defined, or at least best described, as follows: “At zero price, there is greater demand than supply.”
There are a few free lunches. We do not pay for the air that we breathe. At zero price, there is greater supply than demand. Therefore, air is not an economic good. It is not a factor in economic calculation. But clean air is an economic good. Polluted air is an economic bad. To clean the air in order to escape the pollution, somebody is going to have to pay something. Warm air in winter and cool air in summer are economic goods. We must pay to gain the use of them.
A significant conceptual error in economic theory is to imagine that something is a free good when it is not. For example, there is a phrase: “Information wants to be free.” This is a silly phrase. First, information doesn’t think. Second, lots of people are looking for ways to use the Internet in order to sell information. I certainly am one of these people. This is why I have a subscription website: GaryNorth.com. Somebody has to pay to collect information, evaluate it, and post it on the Internet, where people can find it by using Google. Google is one of the most profitable companies in the world. It is not providing its services for free. Here is a good rule of thumb: “When something online is free, you’re not the customer, you’re the product.” One of the finest economic treatises ever written is Thomas Sowell’s book, Knowledge and Decisions (1980). The book’s premise is this economic principle: “There is no such thing as accurate free knowledge. Someone must pay for it.” The book is an exploration of ways in which people have sought and paid for better knowledge, but it also explores those areas of the economy in which people have mistakenly believed that accurate information can and should be free.
The word “free” is one of the most powerful words for marketing anything. It is matched in the power to generate money only by the word “you.” I speak from experience. I have been a direct-response marketer for over four decades. People know that they will be asked to buy something or do something if they respond positively to the word “free.” They have learned this from experience. But, in some cases, people believe that they can benefit from something that is offered free of charge.
A major problem comes when politicians invoke the word “free.” When a politician promises something for free, we can be sure that he has a plan to coerce someone to pay for the free good or service. Whenever you hear a politician use the word “free,” keep your hand upon your wallet, and your back against the wall.
This is a fundamental principle of all economic theory. Put differently, something is better than nothing. If this principle were not true, it would be impossible to devise a theory of predictable economic cause-and-effect.
Whenever an economist says more is better, he also has in the back of his mind this qualification: at the same price or a lower price. He may not say it, but it always qualifies his assertion that more is better. More may not be better at a higher price, but more is always better at the same price or lower price. This is the economist’s most widespread use of this assumption: other things remaining constant (ceteris paribus).
Why is more better? In the religion of mammon, it is better because it offers owners more opportunities to consume. But this makes little sense when we discuss the motivations of successful entrepreneurs who are wealthy. It makes zero sense when we are discussing superrich individuals who are worth so much money that if they spent the equivalent of a month’s worth of income for the average person every day, they could not possibly consume their wealth in a lifetime. They are not working to consume. They are not bearing the uncertainty of ownership for the sake of greater consumption. They believe that more is better, but they do not believe that more is better for the sake of their own consumption or consumption by their children. To begin with the assumption that more is better because it enables people to consume more becomes ever-less relevant in a world in which there is compound economic growth.
More is better because of the dominion covenant. It is God’s property that we are managing. The parable of talents makes this clear. God wants more, not for the sake of consumption, but for the sake of dominion. He wants more for the sake of God’s plan for the ages. He wants to give it away. He wants to give it to the church. But the church in the world beyond the final judgment will continue to extend the dominion covenant. God is infinite. Mankind will never comprehend God fully. Mankind will never find all of the possible uses for the creation. There is always more to be learned. We are not moving toward equilibrium. We are not moving toward satiation. On the contrary, we are moving toward greater expansion and development. Dominion is a never-ending process. More is better for the sake of the dominion process. It is not an autonomous process. It is part of God’s decree for the extension of the dominion covenant in time and eternity.
God wants more from His stewards. This is the ultimate grounding of the phrase: more is better.
This phrase is an extension of the previous phrase: more is better. This phrase ultimately has to do with covenantal sanctions. The intermediary covenantal sanctions are heaven vs. hell (Luke 16). The final covenantal sanctions are the post-resurrection new heaven and new earth (Revelation 21, 22) vs. the lake of fire (Revelation 20:14–15). Historical sanctions reflect the ultimate covenantal sanctions. They are positive and negative. They are more and less. They are profit and loss.
Economic theory rests on the assumption that people make decisions in terms of whether they think their decisions will lead either to positive sanctions or negative sanctions. These decisions have to do with the allocation of scarce resources. In other words, they are part of the stewardship process. They pursue positive sanctions because God requires this. More is better. They seek to avoid negative sanctions because God requires this. Less is worse. We see this principle applied in the parable of the stewards. The rebellious steward buried his coin. After the owner condemns him verbally, he has his subordinates give that coin to the most successful steward. “Therefore take away the talent from him and give it to the servant who has ten talents. For to everyone who possesses, more will be given—even more abundantly. But from anyone who does not possess anything, even what he does have will be taken away. Throw the worthless servant into the outer darkness, where there will be weeping and grinding of teeth” (Matthew 25:28–30).
From an organizational standpoint, whoever designs the organization’s rules must consider carefully the goals of the organization. Then he or a committee must design a system of institutional sanctions that persuades employees to pursue one set of goals that will be beneficial for the organization, and also avoid certain kinds of behavior that will lead to setbacks for the organization. The economist teaches that people respond to incentives. If the marketplace rewards one kind of behavior, then people will behave accordingly.
A clever critique of government programs to reduce poverty is this one: “When the government pays people to be poor, the market will respond accordingly.” Conclusion: if you want more poor people, pay them. But, of course, politicians insist that they do not want more poor people. They want to reduce the number of poor people. But their programs never seem to accomplish this. That is because of the nature of the incentives that the programs offer. The incentives are inconsistent with the goals of the programs. The subdivision of economics known as public choice theory recommends that economists, policy-makers, and voters examine the incentive structure of government programs in terms of this presupposition: “The results of the institutional incentives will be beneficial to the administrators of the programs.”
This is the governing rule of every auction. When participants attend an auction, they are not resentful of the principle of distribution governing the auction. They understand that, at the end of each round of bidding, the highest-bidding bidder will take home the item offered for sale. This is a simple way to allocate scarce resources. No one complains that the person who made the highest bid became the owner of the property. This bidding process reduces antagonisms. It establishes peace. Peace in turn creates an incentive for other auctioneers to enter the marketplace and make available additional items for sale.
The free market is a gigantic auction. It is not just that the free market is best understood as a gigantic auction. It is in fact a gigantic auction. The price system is the result of competitive bidding in this gigantic auction. The governing principle of “high bid wins” is structured in terms of this economic law: “more is better.” More money is better for the producer than less money. It is also better for the retailer or middleman. Consumers want producers to continue to work on their behalf. Therefore, they understand the distribution principle of high bid wins, and they abide by it whenever they enter the marketplace to make purchases.
If bids continue to be high, auction after auction, other auctioneers will enter the marketplace to supply it with even more goods. These new auctioneers see an opportunity: a single auctioneer who is attracting many bidders with large bank accounts. They wish to take advantage of this opportunity. The result of this will be a greater number of opportunities for bidders to purchase goods at prices lower than they had been paying to a single auctioneer.
Because the general public does not understand that the free market is a gigantic auction in which prices are part of the bidding process, people in their capacity as citizens grow resentful of the outcome of the auction process. They resent the fact that those who make the highest bids become owners of property. As citizens and voters, they pressure politicians to pass laws that interfere with the auction process’s governing principle. One outcome of such laws is a reduced supply of auctioneers offering products for sale. Another outcome is that the government must impose a different system of allocation that is based on a different principle from high monetary bid wins. It may be the principle of “highest number of votes wins.” Or it may be the principle of “highest level of campaign donations wins.”
All of this is the result of this fundamental economic issue: scarcity. At zero price, there is greater demand than supply.
The phrase “supply and demand” is almost a stand-alone phrase. It has become a catch phrase to describe the market process. It is an accurate phrase. It accurately describes the free market. Even more important, it accurately describes the free market process. The market process is the heart of the free market’s system of ownership allocation.
Here is the two-part law of demand: “When prices fall, more is demanded. When prices rise, less is demanded.” Here is the two-part law of supply. “When prices rise, more is supplied. When prices fall, less is supplied.” I will now do my best to explain these two laws.
Some people want to sell goods for money. Other people are willing to spend money to buy goods. These people interact in order to make exchanges. Owners disown one thing for the sake of buying another thing. Those supplying goods are owners of goods. Those supplying money are owners of money.
Consider rising demand. As owners of money increase their bids against each other to become owners of goods and services, suppliers are alerted by rising prices to the possibility of making profitable sales. Listed prices are the specific results of actual sales. If prices are high enough to attract the attention of potential suppliers, these potential suppliers will enter the marketplace and offer to sell at prices lower than the ones that recently prevailed. Suppliers compete against suppliers. When they compete, this leads to lower prices, better terms, improved quality, and free delivery. Consumers benefit.
When lots of consumers are willing to spend their money on goods that are quite scarce, sellers raise their prices. When an auctioneer calls for a higher bid, nobody in the room accuses him of being an exploiter. But when sellers ask for higher bids in a market that is not labeled an auction, consumers sometimes blame sellers for being exploiters. Sellers are governed by the auction’s allocational principle of high bid wins. Because buyers do not understand the free market is a gigantic auction, they are sometimes tempted to blame the sellers for gouging them. But the gougers are not the sellers. The gougers are other consumers. Consumers compete against consumers. They bid up prices.
The law of supply and demand is really the law of resource allocation. It is an outworking of this law: more is better. Consumers want more goods. So, they want lower prices. Suppliers want more money. So, they want higher prices. Suppliers are not autonomous. Consumers are not autonomous. Suppliers need consumers to achieve their goals. Consumers need suppliers to achieve their goals. The market process is the way that specific consumers and specific suppliers reconcile their individual plans. The primary tool of this reconciliation process is the price system. It is a system of competitive bidding. Here is its rule: high bid wins.
Economists sometimes speak of consumer sovereignty. That phrase was coined by a friend of mine, W. H. Hutt. I was a graduate student when he was an elder statesman of economics. For decades, I used the phrase “consumer sovereignty.” But I have become convinced that it is inappropriate.
The concept of sovereignty is a judicial concept. It has to do with legal rights. In the field of economics, it has to do with ownership. This is God-delegated ownership, according to Christian economics. Ownership applies to owners of money as well as owners of goods and labor. Owners of money and owners of goods and labor are equally sovereign judicially. They both should receive equal protection of their ownership rights by the civil government. In other words, there is no conceptual difference between consumer sovereignty and supplier sovereignty.
In contrast, there is a tremendous difference between consumers’ authority and suppliers’ authority. This is because consumers own money. Money is the most marketable commodity. This is the best definition of money. As the most marketable commodity, it has the widest marketplace of competing sellers. Sellers compete against sellers. Sellers are owners of goods and labor with relatively narrow markets. They make their profits by specializing in production. Specialized production is narrow production. So, sellers usually bid more fervently against other sellers to get consumers’ money than consumers bid against other consumers to buy sellers’ output.
There is an asymmetric market relationship between consumers and sellers. There is an English phrase: “He is in the driver’s seat.” The context is someone who is driving an automobile. The consumer is in the driver’s seat. What he says, goes. He is more likely to walk away from a potential exchange than a seller is. That is because there are so many other sellers competing against each other to supply him. He is facing a wide market. Each of the sellers is facing a narrow market.
Critics with a bias against the free market have long complained against sellers who exploit consumers. They see sellers as dominant in the transaction. They believe in sellers’ authority. This is because they do not understand that money is the most marketable commodity. They do not understand the implications of the fact that money is the most marketable commodity. They look at the fact that sellers initially set prices. They conclude that sellers have authority in market exchanges. This conclusion is incorrect. Sellers announce prices, but they cannot coerce consumers to pay these prices. Consumers can easily walk away from the deal. They can shop elsewhere. The fact that a seller announces a particular price for a particular item is an aspect of sellers’ sovereignty. The seller has a legal right to ask whatever he wants for whatever it is he is selling. But sellers’ sovereignty is not the same as sellers’ authority. They are radically different concepts. One is judicial; the other is economic. To put it in covenantal terms: one is based on trusteeship; the other is based on stewardship. In the marketplace, stewardship is more powerful than trusteeship. Consumers have more authority as stewards than sellers do.
The word “cost” does not convey enough information. The concept of cost is really opportunity cost. More specifically, it is opportunity foregone cost.
Jesus told His disciples to count the cost. This had to do with foregone opportunities. In the context in which He presented this, the foregone opportunities were opportunities to suffer losses. “For which of you who desires to build a tower does not first sit down and count the cost to calculate if he has what he needs to complete it? Otherwise, when he has laid a foundation and is not able to finish, all who see it will begin to mock him, saying, ‘This man began to build and was not able to finish’” (Luke 14:28–30). The first calculation had to do with available resources. The second calculation had to do with public humiliation.
If the person decided to begin the project, he would have to spend money to complete it. Whatever he could have done with that money, had he decided not to begin the project, is the loss that he sustains. Specifically, the most valuable thing that he could have done with his money is what he pays to begin the project. This would be his forfeited opportunity cost. Second, there was a negative sanction of public humiliation. He could have avoided this negative sanction had he not begun the project. We do not have a good phrase to describe an avoided negative sanction. It is not an opportunity cost. Cost is a negative sanction. Avoiding public humiliation is positive.
A rational economic decision is one in which the expected positive outcome of the decision to spend money on something is marginally better than the expected positive outcome of the decision to spend money on something else. It is a matter of making decisions at the margin. One thing is a little bit better than something else. Anyway, we expect it to be a little bit better than something else. We do not take into consideration all of the other things that we might also have done with our money, all of which were inferior to that one thing that we use to evaluate the economic concept: marginally worse or marginally better.
It is easier to understand the concept of opportunity cost when we are discussing marriage. When you marry someone, you forgo the opportunity of marrying one person among all the others who might have been a good partner. Your cost of marrying someone is not the forfeited opportunity of marrying someone spectacular unless there was a real possibility that someone spectacular would have agreed to marry you. What you forfeit in marrying someone is the opportunity to have married someone else who was marginally superior. This is not the language of romance, but it is the language of economics. I do not recommend that you say this to your spouse on your 50th wedding anniversary: “I still regard you as marginally superior to all the others I might have married.”
We see this Latin phrase in economics textbooks, treatises, monographs, and scholarly articles. The phrase means this: other things remaining constant. This phrase is widely used in economic treatises, but it applies to all other academic disciplines. It is basic to the analysis of change. As I have already written, the most widespread economic application of this concept is this one: at the same price.
This goes back to the dualism between Parmenides and Heraclitus. Parmenides believed that logic is unchanging internally. He also believed that logic governs the world. But if logic does not change internally, then historical change does not change anything meaningful. Irrelevant things may change. Irrelevant things come and go. But meaningful things are understood and evaluated in terms of permanent logic.
In contrast is the realm of Heraclitus: everything changes. “You can’t stick your foot into the same river twice.” But the river is not the same. Then how can we speak of “the river”? Which river? What is a river? Is a river a stream? What is the unchanging reality by which we determine or decide whether we are dealing with a river or a stream? So, the followers of Heraclitus have to call upon the unchanging reality of Parmenides’ trans-historical stability.
What is meaningful change? Economists, along with all other social theorists, offer logical theories of causation that somehow apply to history. But history keeps changing. How do we know which elements of history are relevant to our discussion, and how do we distinguish these elements from the incalculable number of historical changes that are not relevant?
Economists work to devise a logical system of cause-and-effect. As social theory goes, economics is by far the most logical system of cause-and-effect. It has better predictive powers than the other social theories. But it does so only on the basis of the judgment of a specific economist regarding what is relevant in the logic of economics and what is irrelevant in the realm of history. When I say “relevant,” I mean relevant to a discussion of cause-and-effect that is based on supposedly unchanging economic laws.
There is a famous observation: “You can’t change just one thing.” This is an accurate assessment of historical change. When the economist invokes ceteris paribus, he is invoking a conceptual world in which changes that are not governed by his economic theory can be safely dismissed as irrelevant to the question at hand. But how does he know this? How can he prove this? He presents his argument. He hopes his readers will believe his argument. He dreads the day that his argument can be made irrelevant by the fact that crucial things do not remain the same. They change mightily, and they change significantly. His theory no longer predicts the future accurately. It no longer predicts human behavior accurately. Maybe it never did. Maybe it always was a castle in the sky.
Other things never remain constant. The best that economists can hope for is this: when things change, they do not significantly affect either the logic of their theory or the accuracy of their predictions.
“The law of unintended consequences” is more of a slogan than it is a law that is found in an economics textbook. Yet, because of the inability of men to forecast the future perfectly, there really is a law of unintended consequences. We cannot change just one thing. When we change something, this launches a series of consequences that could not have been foreseen by anybody except God. When we adopt an economic theory to devise a policy or a plan to achieve a particular goal, we may achieve that goal, but we will inevitably also produce a series of consequences that we had not intended. Some of them may be positive. But, life being what it is, we will notice mainly the ones that are negative. We will especially notice the ones that are negative as the result of an opponent’s theory of causation, which he then persuaded someone to implement.
The law of unintended consequences is a warning to all men they should remain humble. Cause-and-effect is complex. The minds of men are limited. In every realm of thought and every realm of action, we face this problem: “The best-laid plans of mice and men often go awry.”
When he devised his theory of economic determinism, Karl Marx did not foresee the tyrannies that were built in his name. Vladimir Lenin was Marx’s trustee. So was Mao Zedong. So were all of the imitators of these two tyrants. They acted in Marx’s name. The critics of Marx in his lifetime could not foresee that Lenin, alone among European revolutionaries in the late nineteenth century, would succeed in capturing a nation in 1917. Lenin did not foresee Stalin. The Soviet Union and Communist China were unintended consequences of Marx’s theory. The number of executions committed by Lenin, Stalin, and Mao is unknown, but this may have been in the range of 90 million people. Those few adherents who still proclaim allegiance to Marx’s name insist that the Soviet Union and Communist China were not really Marxist. Somehow, they were not really representative of Marx’s philosophy. But they were representative. They were more horrendous than Marx would have forecasted, but those few people who analyzed Marx during his lifetime should have seen what could come as a result of his religion of revolution. Marx believed the Communist revolution would come in the industrial West. Instead, it came in the agricultural East. The revolution did not take place in the industrial West. It took place in the partially industrialized East of Russia and the agricultural East of China. They were unintended consequences, but they were consistent consequences.
Profit and loss are sanctions. They are sanctions of a very special kind, analytically speaking. They are the outcome of entrepreneurial foresight and entrepreneurial organization. An entrepreneur believes that future consumers will buy the output of his organization at prices that will produce a profit for him.
An entrepreneur makes a profit only because he can buy low and sell high. He can buy low because his competitors do not see the future opportunity, so they do not bid up the prices of the productive goods and labor services that he needs in order to bring a product to market. Similarly, he can sell high only because his competitors did not see the opportunity, and they do not bring the output of a competing product line to the market, thereby forcing down prices. Profit comes from the inherent uncertainty of the marketplace. People do not see the future clearly. Some people see it more clearly than others. It may be part of creative imagination. It may be that a person has access to information that is not generally available or is not believed. He has an advantage in the area of information. He has specialized knowledge that others do not possess or presently ignore.
Losses arise when an entrepreneur does not forecast accurately what consumers will be willing to pay, or he does not forecast accurately the costs of bringing his goods to market. He buys too high, and he sells too low. He had great expectations, but reality smashes his expectations.
The lure of profit is so great that entrepreneurs launch ventures that probably will fail, statistically speaking. Most new ventures fail. Yet, in the society at large, consumers benefit from the competition of entrepreneurs. Consumers do not pay out of their pockets for the losses sustained by entrepreneurs who did not forecast the future accurately. Consumers benefit from the accurate forecasts and efficient methods of production adopted by entrepreneurs who bring to market goods and services that consumers are willing to pay for. They benefit from those entrepreneurs who accurately forecasted what consumers want to buy, when they want to buy it, and where they want to buy. They also benefit from failed entrepreneurial projects when the output of these projects is sold at a steep discount. Why do entrepreneurs sell their output at such low prices? Because of this economic law: more is better. Put differently, something is better than nothing. It is better to get some money out of a project that should never have been launched than to get no money out of it.
This is an aspect of another economic law, the law of sunk costs. It would have been better if the failed entrepreneurial venture was never begun. But it was begun. The entrepreneur then searches for ways to salvage something out of his bad decision. Perhaps he sells it online on an auction site. Perhaps he sells it to a discounter, who will in turn sell it at a discount to large retail stores that target people who are in search of bargains. It does not matter what the entrepreneur paid for raw materials, capital equipment, and labor in order to bring a product to market. Those costs are sunk. They are gone forever. He owns only the output of those sunk costs. He makes a decision as to how to bring in the most money from this output. If he wants to stay in business, he will ignore the sunk costs of the past. If he focuses on them, the sense of loss may paralyze him, and he may lose the optimism necessary to remain an entrepreneur. It is better for an entrepreneur mentally to write off past costs as sunk costs, and then do the best he can with whatever he has.
The word “exploit” has a negative connotation. It is associated with economic persecution. But the alternative phrase, “take advantage of,” also sometimes has that same pejorative connotation. So, I use the word “exploit.”
If you are walking along the street, and you look down and see a gold coin in the gutter, will you reach down and pick it up? I think you will. You may look in a local newspaper or website to see if anybody has reported a lost gold coin. If you see such an announcement, you should contact the person who made the announcement. But probably you will not find the owner. So, you are the owner. In English, there is a phrase for this: “finders, keepers.” Jesus used this judicial principle in one of His parables, the parable of the hidden treasure (Matthew 13:44–46). It appears in the main New Testament passage on the kingdom of God.
If you do not reach down, pick up the coin, and put it in your pocket, you have decided not to exploit an opportunity. But the opportunity was there. Someone else may exploit it. Perhaps no one will exploit it. The coin may go down the gutter’s drain. Maybe it will remain lost. But it will always be your personal loss. You saw the opportunity, and you did not exploit it. Someone who did not see the coin will not experience a loss. A loss only counts with opportunities perceived and then missed. Someone who did not buy a stock that rose subsequently by 100-to-one did not experience a loss if he had never heard of that stock. On the other hand, if he did hear about it, and he dismissed it, then he did suffer a loss. He was ready to buy it, but he decided not to buy it. He made a conscious decision, and that decision cost him whatever profit he would have experienced as an owner.
Economic theory rests heavily on the fact that people exploit opportunities. This is why people take risks. This is why they bear uncertainties. This is why they sacrifice in the present in order to profit in the future. This fact is extremely important in price theory. If something is selling too low in one region or on one market, there will be investors who buy that item, and then sell it wherever it is more highly valued. If an entrepreneur makes a breakthrough in a new production technique, and if that technique is not patented by the discoverer, then other entrepreneurs will see an opportunity for a profit. They will use this new technique to increase output, and increased output will lead to lower prices as a result of price competition. Consumers benefit. High profits announce opportunities to entrepreneurs. Entrepreneurs take advantage of these opportunities.
High profits send a signal to entrepreneurs. This signal announces that consumers are willing to pay high prices for some good or service. This signal leads to new entrants into the marketplace to sell whatever it is that consumers have been willing to pay high prices to buy. The entire market process is based on the fact that people exploit opportunities. If they did not exploit opportunities, there would be no way for the vast bulk of consumers to buy what they want at prices they are willing to pay. If there is no exploitation of opportunities in a free market, a handful of consumers with a lot of money will continue to buy the minimal output of some entrepreneur who had a great idea. Other consumers will not be able to buy the output of an increasing number of new entrants into the market. Why not? Because the new entrants either did not perceive the opportunity or else they ignored it. Worse, from the point of view of economic theory, they were not even looking for opportunities. They were not motivated by the lure of profit. They were content to sell the same old products to the same old consumers.
Consumers are also looking for opportunities. They shop. Now that they have the World Wide Web, they shop more intensely than ever. They are looking for bargains. A bargain is an opportunity. Nobody gets upset when a consumer goes shopping for a bargain. Yet some people who do not understand economic theory do get upset when they hear about businessmen who exploit opportunities. Exploiting an opportunity is not the same as exploiting a poor person. Exploiting an opportunity may be a way to raise the wealth of a poor person who could not otherwise have afforded to purchase some item.
The fact that people exploit opportunities is fundamental to a theory of progress and its related concept, economic growth. This is true of a biblical theory of progress, and it is also true of a humanistic theory of progress.
We are responsible in the present. We may not be alive to be responsible in the future. Our service to God as stewards is always in the present. It is focused on the future. All people are future-oriented to some extent. A covenant-keeper is supposed to be highly future-oriented. He cares about his future with respect to heaven and hell. He cares about his future with respect to the post-resurrection new heaven and new earth and also the lake of fire.
The fact that we are responsible now for whatever we own makes us responsible for the allocation of these resources in the immediate future for the sake of the long-term future. The sooner that we invest in a long-term venture that will probably generate a positive compound rate of return, the more rapidly that this investment will grow in value. We are concerned with sooner because we are concerned with later.
If we have the choice of receiving something of value immediately or the same thing in the future, we ask for it now. We are responsible now for the administration of that asset. Only if someone is going to store it for us free of charge, and we need it stored for a period of time, will we reject the offer of delivering it to us now. Free storage would constitute something of value in exchange for delaying the delivery of the product now. Free storage is the equivalent of a rate of interest. It is not something for nothing. It is something of value for not having demanded immediate delivery.
This is the source of the rate of interest. This is why goods in the present are worth more to us now than the promise of the same goods in the future. The promise may not be valid. So, there is risk. But I am talking about the actual value of the item, irrespective of the risk of a forfeited promise. We are responsible now; therefore, resources are worth more now than those same resources delivered in the future. Our opportunities to put resources to immediate use are worth more to us now than those same opportunities in the future are worth to us now. If we delay the delivery of the item, we are forfeiting opportunities. If we surrender the present use of the item in exchange for a promise of its use in the future, we are surrendering opportunities. Opportunities are valuable. We do not surrender opportunities in the present for the sake of the same opportunities in the future.
Economic theory is a theory of trade-offs. It is a theory of this, not that. A trade-off is a theory of costs. If I buy one thing, I must pay for it by not buying something else. This is an aspect of scarcity.
The most significant trade-off that men face is this one: the kingdom of God vs. the kingdom of man. This is a trade-off between redemption and damnation. They are mutually exclusive. One or the other is inevitable in every person’s life. It really is either/or. The cost of redemption was high. Men do not pay it. Christ paid it. But it was paid. However, this is not an economic trade-off for people. “For by grace you have been saved through faith, and this did not come from you, it is the gift of God, not from works and so no one may boast” (Ephesians 2:8–9).
With respect to an economic trade-off, the most significant one is time vs. money. Time is a constant. From the point of view of God’s decree, we cannot buy any more of it. But from the point of view of earthly decision-making, occasionally we can buy more of it. Medical treatment in a life-and-death emergency is an example. But these are rare cases. Time moves forward relentlessly. What we do with it makes a difference. We must sacrifice doing one thing in order to do something else. We pay for one activity or one result by means of forfeited time. This is an allocation decision.
Most young adults do not have much money. In comparison with total life expectancy, they have considerable time. As they age, they begin to run out of time. They may gain more money. No matter how much money they make, they will eventually run out of time. So, the value of their time increases in relationship to the value of their money. This is God’s imputation. It may not be man’s imputation. The difference between God’s imputation and man’s imputation is best seen in the Bible with Jesus’ parable of the rich man who planned to build barns to store his grain. “He said, ‘This is what I will do. I will pull down my barns and build bigger ones, and there I will store all of my grain and other goods. I will say to my soul, “Soul, you have many goods stored up for many years. Rest easy, eat, drink, be merry.”’ But God said to him, ‘Foolish man, tonight your soul is required of you, and the things you have prepared, whose will they be?’” (Luke 12:18–20). He ran out of time that night. He was at no risk of running out of money. He had big plans for the future. He had no future. This is a biblical model of foolishness.
For a covenant-keeper, the money value of his time should constantly be increasing. This was not the case in the parable of the rich man who wanted to build barns. He placed an extremely low value on his time. This is a warning against pricing our time so low. As the supply of our available time decreases, it should rise in value in our subjective imputation. Most individuals have a rising demand for time as time runs out. If the supply of something steadily decreases, and the demand for it remains the same, then its price should rise. As people age, they should be far more alert to the remaining opportunities that they can purchase with their available time. The value of those opportunities should constantly be rising in the economic imputations of aging people. This is because opportunities also are in short supply. If people can purchase these opportunities with money, they would be wise to do so. If these opportunities can be used to build the kingdom of God, they are morally required to do so. As Jesus said about the parable of the rich man, “That is what someone is like who stores up treasure for himself and is not rich toward God’ (Luke 12:21).
Because sooner is better than later, there is a time value of money. If you can do something now or do something later, you should do it now (at the same price). This is why there is a rate of interest on money. There is a rate of interest on any asset that is forfeited in the present in exchange for the promise of the same asset in the future.
If there is time value for money, there is money value for time. If they can be exchanged, then each is valued in relation to the other. If I work for someone else, I am exchanging my time for money. If I hire someone else, I am exchanging my money for time. If my time is valuable, I may hire someone else to do a task that I want completed.
This law is better known as the law of diminishing returns. This law is both a physical law and an economic law. It is easier to understand the physical law.
A raw material that is found in nature is a product of nature. It is not the product of human action: technology or science. Every product of human action is the result of at least two complementary factors of production. When there is only one of these factors, there is no product. There is simply a resource. Technically, as a complementary factor of production is added to the production mix, there is a rapid increase in output. It goes from no output to some output in one step. Output will continue to increase until the point at which, technically speaking, there is an excessive quantity of the complementary factory production. This point is just beyond the point known as the optimum technological production mix. If more units of the complementary factor of production are added, the output will more and more resemble the complementary factor of production. The percentage of the complementary factor will continue to increase. This slows the rate of increase in output per unit of complementary resource input. This is the phase known as diminishing returns.
In economic theory, prices are crucial in establishing the law variable proportions. Whatever is the most efficient mix technologically in terms of total output may not be the case economically, depending on the prices of the factors of production. But the same process applies: first an increase in value, then a slowing rate of increase. As more units of the complementary factor production are added, at some point the cost of one additional unit will be greater than the added value of the output of both factors of production. This slows the rate of increase in value per unit of the complementary resource input. This is the phase known as diminishing returns. It begins just beyond what is known as the optimum economic production mix. The optimum production mix is dependent on prices. I discussed this in Chapter 7 of my commentary in Exodus, Authority and Dominion. Pharaoh understood this law’s application, which is why he required the Hebrews to produce the same amount of bricks without supping them with straw, as he had before Moses challenged his authority.
Modern economics believes that economic value is subjectively imputed to goods and services. This was the revolution in economic thought that took place in the early 1870s. It marked the transition from philosophical realism to philosophical nominalism.
Economists use the ethically neutral term utility rather than value. This seems like a minor verbal point, which technically it is. But this verbal preference is an aspect of modern economics’ commitment to a theory of value-free economics. So, it is not a minor point with respect to economists’ epistemology.
There were two crucial insights of the economic revolution of the 1870s. One of them was the move from realism to nominalism, meaning the move from objective value to imputed subjective value. But there was another important aspect: the concept of the marginal unit or the marginal decision. This had to do with the idea of one additional unit. This unit is the focus of decision-making: what you must give up in order to become the owner of one unit of some good or service. It is the idea of the trade-off in specific decisions. We do not make trade-offs between gold in general vs. land in general. We make trade-offs in terms of a specific quantity of gold vs. a specific piece of land. These are marginal units. They are units at the margin of our decision-making. This is very different from the concept of something that is of marginal importance. That use of “marginal” indicates something of minimal value. Marginal value theory or marginal utility theory has to do with specific trade-offs.
Marginal utility theory says that, as an individual gains ownership of more units of something, each additional unit is worth less to him than the immediately preceding unit was worth to him. This is because he used the immediately preceding unit to satisfy some want that was high on his value scale. The next unit of this item will be used to satisfy something lower on his value scale. This assumes, of course, that other things remain constant, especially tastes. This is the doctrine of declining marginal utility. It assumes the following: as people get richer, they will use their additional income to satisfy wants that are lower on their scale of economic values.
This insight was used by Cambridge University economist A. C. Pigou to justify progressive income taxation. He argued that the benefits of any additional income to a rich person are lower than the benefits of this same income for a poor person. Therefore, the government can increase total social utility by taking away an increasing percentage of rich people’s income and transferring it to poor people. His book, The Economics of Welfare (1911), became the single most important volume in the development of what is known as welfare economics.
The same line of argumentation could be used to show that rich people can easily afford to give a higher percentage of their income to charities than poor people can. Unfortunately for the theory, the opposite holds true in actual giving. Poor people are more generous in giving money away than all but the superrich.
If I gave more thought to it, I could probably come up with additional economic laws. But these are sufficient for understanding not only Christian economic theory but also humanistic economic theory.
If I had come up with more of them, this would only make it more difficult for you to remember all of them. It is the teacher’s task and the scholar’s task to keep them all in mind, and be ready to apply any of them to a specific analytical matter. The art of being a good teacher or good scholar is the art of casuistry: applying the appropriate general principle to the specific question at hand. There will always be an element of artistic creativity in scholarship because of the need for casuistry. If you review these laws from time to time, and think about them for a few minutes at a time, you will be better prepared for the inevitable task of casuistry.
I do not recall any economics textbook that listed the fundamental economic laws in the final chapter or anywhere else. Perhaps some economist has done this. But probably not. Why not? Because there is a risk that his peers would regard such an exercise as presumptuous, or elementary, or worst of all, not scholarly. I think it is a better strategy to help readers remember the most important issues than to become bogged down in the arcane language of academia just for the sake of impressing one’s academic peers.
It is extremely difficult for people to remember long chains of reasoning. The more sophisticated and detailed these chains of reasoning are, the less equipped most people are to analyze them accurately. Therefore, it is better to know a few analytical principles well, and to apply them creatively and accurately to specific cases, than it is to remember long chains of reasoning, but then fail to apply them coherently to specific cases. It is far better to do a simple thing well than to do a complex thing poorly. This is true in every area of life.
Of all of these laws, the most familiar one and the most widely used one by humanistic economists is this one: no free lunches. They begin with this one. I recommend that you do not follow this lead. The most important law of economics is this one: responsibility accompanies ownership. Begin with this one. End with this one. Why? Because it points back to this law: God owns everything.
Then why not start with God owns everything? Because, from an analytical standpoint, responsibility accompanies ownership applies to a wider number of economic cases than God owns everything does. God owns everything applies to all fields of study and every area of life. Responsibility accompanies ownership applies more specifically to economic theory than to other academic disciplines. Also, responsibility accompanies ownership is neglected by most economists. They would not regard it as a fundamental economic law for analytical purposes. This is because the issue of responsibility is inherently a judicial and ethical issue. Humanistic economists insist that economic theory is value-free. They do not want to bring up the issue of responsibility if they can avoid it. This raises a question: “responsibility to whom?” They do not wish to raise this question. Instead, they talk about consumption as the ultimate goal of economic decision-making. This is the religion of mammon: more for me in history. This is the economics of the barn-builder.
____________________________
The complete manuscript is here: https://www.garynorth.com/public/department196.cfm
© 2022 GaryNorth.com, Inc., 2005-2021 All Rights Reserved. Reproduction without permission prohibited.