Christianity and Economics, Part 8: Regulation and Doing the Right Thing

To read other parts in the Christianity and Economics series, click here.

In a free market economy, scarce resources are continually directed towards the ends most valued by consumers (See Part 4). There are times, however, when people who are not happy with a particular market outcome will turn to governing authorities to enact some sort of regulation of the market. Many seem to think that the free market is generally very good and efficient at allocating resources, but if allowed to operate too freely, it will enable the greedy and dishonest to take advantage of others. It is argued that the government should occasionally use their power to steer the market back toward the public good.

Those who advocate for the government’s regulation of the economy are often well intended, and it’s easy to sympathize with their concerns. Who wants to worry about giving their children unsafe medicine? Who likes the idea of people being asked to work long hours in unsafe working conditions? Who wants to be mislead by a dishonest salesman into buying a poor quality product? What can be done to protect consumers against greedy and dishonest business practices?

Most people think the obvious answer is to have the government pass laws to regulate against harmful business practices. However, as we consider regulatory practices, we must consider both the economic and ethical implications. The truth is that government intervention in the economy is unhelpful in improving market outcomes, and it is an unethical means of doing so.

The Economics of Interventionism

The free-market economy lowers prices and increases the quality of goods and services by means of competition. As was explained in Part 6, voluntary exchange will only occur when both parties believe the transaction is beneficial. If one party views an exchange as harmful, they can simply refuse the transaction to pursue a better alternative.

When government intervenes in the production and exchange of goods, it does so by passing regulations in the name of “protecting” the public. But the problem with economic regulation is that it enables some parties to benefit, but only at the expense of other parties who do not benefit. For this reason, those who wish to benefit in a interventionist economy will have economic incentives to serve the politicians and bureaucrats who pass those regulations, rather than the consumers who buy their products. To explain why this is the case, consider the following example.

Imagine you open a small business as a shoe maker. Your top priority is returning customers. To this end, you choose your materials, your styles, your production methods, your product placement, your prices, and your delivery methods based off of what your consumer wants. If consumers value the shoes you produce, you earn profits. If consumers does not value it, you suffer losses (Part 4). Since there are plenty of other shoe makers in the market, you must continually strive to produce superior value for your consumers, or else they will choose to buy their shoes from somewhere else. The presence of competition, along with the importance of maintaining a good reputation with your customers, ensures that businesses remain committed to serving their customers in the best way possible. Although there is no guarantee that there will be no “bad” shoe makers out there, it does mean that “bad” shoe makers will be forced to either improve their product to satisfy their customer’s desires, or else lose potential profits as customers chose to pursue other options.

Now imagine the government decided to take action to protect consumers from “bad” shoe makers by regulating the shoe industry. Rather than allowing entrepreneurs to decide the full process of shoe production, critical decisions about the quality of the material, the production methods, and even how you can advertise your shoes are now made by bureaucrats. To enforce these regulations, the government now requires licenses and compulsory inspections. As a producer of shoes, you must now spend time and resources, not only in producing the kind of product your customer wants, but also in catering to political regulations.

Although this intervention in the shoe market was motivated by the noble goal of protecting consumers from “bad” shoe makers, the new regulations create compliance costs. These increased costs create barriers to potential shoe makers who may wish to enter the market. This reduces competition, which in turn helps the “big” shoe companies, who have more resources available to absorb these new costs. In this way, regulation restricts competition, reduces the supply of shoes, and increases prices, to the detriment of consumers. It would come as no surprise to learn that the “big” shoe companies actually lobbied for those regulations which help them, hurt their rivals, and reduce competition.

This example illustrates an important point. The free market succeeds precisely because competition holds businesses accountable to consumers. Regulation doesn’t work because it incentivizes political favoritism, reduces competition, and ultimately leaves the consumer with less choices. Less competition means less consumer choices, which means that consumers will have to settle for less quality and higher priced goods.

When people engage in voluntary exchange, they do so because they believe they will be better off as a result of the trade (Part 6). In this way, the free market tends to maximize the satisfaction of everyone. Government intervention in the market hinders this process and invites conflict as one party benefits only at the expense of another.

The Ethics of Intervention

The Bible clearly teaches that greed is a sin. Jesus warned that we should “be on your guard against all covetousness” (Lk. 12:15). Paul wrote that covetousness “is idolatry” (Col. 3:5) and warned that “the love of money is a root of all kinds of evils” (1 Tim. 6:10).

The Bible also teaches that fraud is sin. God commands his people to use honest weights and measures in their business dealings (Lev. 19:35-36; Deut. 25:15). Jesus includes “do not defraud” in his answer to the rich man’s question, “What must I do to inherit eternal life?” (Mk. 10:19).

Greed and fraud are serious problems, but the question remains: What should we, as Christians, do about it?

One principle that Christians must remember is that we must not do evil that good may come (Rom. 3:8). It is wrong to forcibly remove a person’s right to manage their own property as they think is best (Part 5). For this reason, economic regulation violates the Biblical commands against theft.

As Christians, we do have a responsibility to overcome evil. But as Paul makes it clear, we must not do this by doing evil. We overcome evil by doing good.

Do not be overcome by evil, but overcome evil with good.

Romans 12:21

A few verses earlier, Paul commands:

Beloved, never avenge yourselves, but leave it to the wrath of God, for it is written, “Vengeance is mine, I will repay, says the Lord.”

Romans 12:19

God does not charge the church with the responsibility of using governing authorities as their military wing to punish evildoers for their sins. To the contrary, Christians are commanded to maintain an attitude of submission to whatever authorities God appoints. (Rom. 13:1-2).

As mere humans, we cannot always know precisely what is in the heart of another person. Suppose a seller sharply raises the prices of his product. Since we have no way of reading minds, we have no ways of knowing for sure if the seller has raised his prices in an attempt to feed his family, or if he is merely greedy. That’s one reason why it is best to leave judgment to God.

This is not to say that Christians should simply accept that evil business practices will go unchecked. Rather because we are confident that each person will give an account before God (Rom. 14:4, 12), and because we are confident that God will repay wrongdoers (Rom. 12:19), we are freed from the responsibility of punishing them for their sins. Since we are confidence that evil will not go unchecked, we can focus on doing good (Rom. 12:21).

On a more practical point, in a free market, even the greediest of sellers can only earn a profit in the long run by giving his customers what they want.  If they try to sell their product for too high of a price, or if they dishonestly mislead their customers, they will eventually earn themselves a poor reputation, and their customers will stop doing business with them. This doesn’t make their greed acceptable. It simply means that in a free market, long term success can only be found by serving others, because without others benefiting from the exchange, there would be no voluntary exchange.

This is not the case in an interventionist economy, where greed can be put into practice by seizing political power to enforce regulations which allow the greedy person to profit at other’s expense, against their will. This seems to have been a major problem in Israel in Micah’s day.

Woe to those who devise wickedness and work evil on their beds!
When the morning dawns, they perform it,
because it is in the power of their hand.
They covet fields and seize them,
and houses, and take them away;
they oppress a man and his house,
a man and his inheritance.

Micah 2:2

When Christians worry that a free market will result in unbridled greed, they do so because they have not learned to think economically. In a free market, no one can “covet fields and seize them” or “oppress a man and his house”. This can only happen when men are granted the power to do so. To receive a profit in a free market, where no one is given the power to rule over another person’s property by the force of law, entrepreneurs must offer something of value to their customers.

It is important to remember that the free market is far from unregulated. Although the free market may be unregulated by the state, it is strictly and continually regulated by consumer preferences.

In this way, Christians can regulate the economy. Although Christians are not permitted to use the government sword to overcome evil, they can work to change people’s preferences. They do this by making disciples, instructing others to follow all the commands of Jesus (Mt. 28:19-20). When people follow Jesus, they will be more loving and kind and honest with their neighbors. This will positively impact their business practices far more than any government enforced regulation. If Christians really want better market outcomes, they should remain faithful to the One who has the ability to transform the hearts and minds of his followers.