Christianity and Economics, Part 6: Voluntary Exchange

For other articles in the Christianity and Economics series, click here.

There are numerous indications in Scripture that God intended for people to work together and help one another. After placing man in the garden, and charging him with the task of working it and keeping it, God said, “It is not good that man should be alone; I will make him a helper fit for him” (Gen. 2:18). God did not intend for people to function as isolated individuals cut off from human interaction. Man is benefited by working together with someone who will help him in his work. This truth is later affirmed in Ecclesiastes 4:9, “Two are better than one, because they have a good reward for their toil.” Much of the New Testament addresses the importance of Christians working together (John 13:33-34; 1 Cor. 1:10-12; 12:12-27; Rom. 12:4-5; Eph. 4:1-6, 11-16; Heb. 10:24-25; 1 John 1:7; 2:9-11).

God designed people to function best through interaction with others. But not all forms of interaction are good. Rather than helping Adam, Eve led him to take the forbidden fruit. One generation later, Cain murdered his brother Able. As mankind failed to work together in mutually beneficial ways, God gave Israel laws to govern their actions.

As the apostle Paul later observed, these laws can be summed up in the commandment to love one another.

Owe no one anything, except to love each other, for the one who loves has fulfilled the law. For the commandments, “You shall not commit adultery, You shall not murder, You shall not steal, You shall not covet”, and any other commandment, are summed up in this word, “You shall love your neighbor as yourself.” Love does no wrong to a neighbor, therefore love is the fulfilling of the law.

Romans 13:8-10; cf. Mt. 22:37-40

When people interact with one another in love, they do not take what belongs others and they do not threaten violence towards others. Rather than forcing their will on others, they seek to peacefully cooperate with one another.

Two Categories of Exchange

As we consider the economics of the interpersonal exchange of goods from a Christian perspective, we start by recognizing that all exchange of goods can fall into one of two categories: forbidden exchange and voluntary exchange.

Forbidden exchange is taking goods for yourself that God has not permitted you to have, that is, taking something that belongs to someone else. If a store has apples, and I want the apples, I could simply take the apples for myself. This of course would be stealing, which is wrong. I could purchase the apples, using counterfeit money. This would be fraud, which is wrong. If the store owner resists, I could choose to carry a weapon into the store and take the apples by force. This would be a threat of murder, which is wrong. Behind all of these actions are attitudes of covetousness and greed, which are wrong. Forbidden exchange is unloving because it harms others.

The other kind of exchange is voluntary. If I want the apples, I could simply choose to buy them. If I don’t have enough money to buy them, I could offer an alternative form of payment. For instance, I might offer to help bag groceries in exchange for the apples. It might even be that the store owner recognizes that I am hungry, and so he voluntarily chooses to give me the apples for free as an act of grace and kindness. In each of these examples, the exchange of the apples is voluntarily agreed upon by both parties.

In either case, I end up with the apples I desire. But unlike forbidden exchange, voluntary exchange benefits both parties involved, and fosters feelings of goodwill, love, and unity.

Voluntary Trade is Always Mutually Beneficial

Many profound and important economic principles can be logically established by reflecting on very simple illustrations. Suppose two boys packed sandwiches for lunch. Opie has a peanut butter and jelly, but prefers ham and cheese. Leon has a ham and cheese, but prefers peanut butter and jelly.

In this situation, we can easily see that both Opie and Leon would be better off by trading sandwiches. Opie could give Leon the peanut butter and jelly in exchange for the ham and cheese. As a result, both boys would enjoy a sandwich they value more than the one they packed.

From this example, a wise economic thinker can observe an important truth. For voluntary exchange to occur, each party must value the end result of the exchange more highly than their original state. If Opie and Leon both preferred their own sandwich over the other’s, they would have no desire to trade.

Similarly, if Opie and Leon both preferred peanut butter and jelly over ham and cheese, no trade would take place. In this situation, Leon would happily trade his ham and cheese for Opie’s peanut butter and jelly, but Opie would not agree to the trade, since he values his own peanut butter and jelly over Leon’s ham and cheese. For voluntary exchange to occur, both parties must view the exchange as an act that will lead to a more preferable situation.

The important implication of this observation is this: voluntary exchange is always expected to be mutually beneficial. Both parties must believe they will benefit from the exchange or they would not agree to the exchange.

If Opie and Leon agree to trade sandwiches, who is better off? As long as they have both voluntarily agreed to the exchange, they are both better off. If either boy believed he would be worse off from the trade, no sandwich exchange would have occurred.

Voluntary Exchange Creates Wealth

 As long as the trade was voluntary, both boys were able to obtain something they value more. We could call this increased value their “profit” (see part 4). Observe that both boys have profited by increasing the value of their lunch, yet without adding a single item of food to the table. The number of sandwiches are the same. The same ingredients are used. And yet, because of the trade, both boys are better off. One boy does not benefit at the expense of another. How can it be that both benefit without adding food to the table? Because both boys value the sandwiches differently.

This illustrates another important principle. Voluntary exchange has the ability to create wealth even with a fixed number of resources. We must not imagine the distribution of wealth as a zero-sum game, where one person gets a bigger slice of a pie only at the expense of leaving the other person with a smaller slice. This is false because wealth is not a fixed sum, but can be increased by voluntary trade. As long as trade is voluntary, there are no “winners” and “losers”, “exploited” and “exploiter”, or “oppressed” and “oppressor.” This is only true, however, when both parties benefit from the trade. Both parties benefit only when it is a trade they would both voluntarily agree to.

It should be noted that the judgments about the benefit of exchange are made before the trade takes place. One or both parties could certainly be in error. Leon may trade for Opie’s peanut butter and jelly, only to later discover that Opie used crunchy peanut butter, and Leon only likes smooth peanut butter. In this situation, Leon was not unjustly taken advantage of by Opie. He was not bullied into trading sandwiches. Leon simply made an error, and suffered a loss of value as a result of the mistake.

As noted in part 4 of this series, losses are important. As a result of the mistake, Leon will learn that he does not in fact prefer Opie’s peanut butter and jelly. Next time Leon sees a friend with a peanut butter and jelly sandwich, before he agrees to a trade he will know to first ask “does your mom use crunchy or smooth peanut butter?” As a result of the loss, Leon will become a wiser entrepreneur.

The Fallacy of “Price Gouging”

Sometimes people have a hard time believing that all voluntary trade is mutually beneficial. For instance, during times of extreme shortages, prices can rapidly increase. It is not uncommon for gas prices to almost double after natural disasters. When gas prices increase, it is common to hear gas stations accused of “price gouging.”

Of course a gas station owner may choose to keep their prices low as an act of kindness. In this case, the gas station owner may willingly choose to suffer financial loss so that they will enjoy the profit of knowing they have helped their customers during a time of need. As long as the decision to keep prices low is voluntary, both parties benefit as a result of the exchange.

But suppose the gas station owner chooses to increase prices. In such a situation, is the owner of the gas station profiting at the expense of those who buy the expensive gas? One might be tempted to think so. But before assuming that the gas station owner is acting unjustly or unloving towards their customers, we must think clearly about the nature of the exchange.

We have observed that for a voluntary exchange to occur, both parties must think that the trade will be mutually beneficial. If gas stations are in fact able to sell their gas at double the price, this must mean that there are buyers who think the gas is more valuable to them than the money they exchange for it. Otherwise, they would simply decide not to purchase the gas. At a minimum we must conclude that the gas station owner is not harming their customers since their customers think they are better off as a result of the exchange. The choice to increase prices may not be as selfless as the gas station owner who decided to keep prices artificially low, but it certainly cannot be described as oppression or exploitation.

On the other hand, if the local government were to force the gas stations to sell their gas at a cheaper price, this could be described as oppression or exploitation, since the exchange of gas would benefit the buyers at the expense of the gas station owners. It can also be noted that reducing the profits of the gas providers would only serve to prolong the shortage by removing the incentive for increased gas production (see part 4).

Oppression and exploitation are only features of forbidden exchange, where dishonestly, theft, and violence enable one party to benefit at another’s expense. As long as exchange is voluntary, no one party will benefit at another’s expense. On the contrary, overall wealth will increase as both parties are able to improve their overall satisfaction.

Christianity and Economics, Part 4: What Does It Profit?

For other parts of this series on Christianity and Economics, click here.

For what does it profit a man to gain the whole world and forfeit his soul?

Mark 8:36

The answer to Jesus’s question is obviously nothing. Even if a man were to gain the whole world, if he loses his soul in the process, he has made a terrible trade. In the end there is no profit at all. There is only tremendous loss.

What is “Profit”?

It’s not uncommon to hear “profit” treated like a bad thing. Just think about all the movies where the villain is some evil businessman that chooses “profits over people.” But profit is not a bad thing. The word “profit” simply means “benefit.”

Profit can certainly be measured in money if the “benefit” sought is money. If I buy something for $3, and I turn around and sell it for $5, I’ve earned a profit of $2. But in a more general sense, such as the sense in which Jesus used the word, profit simply refers to the reward for making good decisions. Giving away money to a charity can be “profitable” if advances a cause that I’m passionate about.

When discussing economics, however, “profit” often takes on the more precise meaning of monetary profit. When all goods can be traded for money, those goods develop market prices defined in amount of money. For this reason profit and loss can be discussed in terms of money. As long as revenue is greater than expenses, there is a profit. If expenses are greater than revenue, there is a loss.

But we must remember that as soon as we limit “profit” to a monetary value, we are no longer making a statement about an entrepreneur’s overall happiness, spiritual well-being, or subjective satisfaction. We are only talking about profit as it is appraised by other members of society, who ultimately determine monetary value through their demand for certain products in relation to their supply.

It’s easy to see how profit benefits an entrepreneur. But what often goes unrecognized is how profit benefits others. In order to explain how this is so we must first consider the problem of resource allocation.

The Complex Problem of Resource Allocation

God created the world with numerous resources, each of which could be used in any number of ways. For example, iron could be used to make all sorts of things – cars, refrigerators, medical devices, construction buildings, houses, power plants, tools, weapons, spoons, etc. The possibilities are endless. The same could be said for all natural resources.

With endless possibilities, mankind is faced with the complex task of deciding what resources, in what quantities, should be used in what ways. What needs are most important? How can we properly use the earth’s resources to help as many people as possible? Even if we are properly motivated impartial love for everyone, how can we know for certain that we are using the earth’s resources most effectively? How much iron should be used for refrigerators? For medical devices? For houses? For machines?

Even if we correctly prioritize the right needs, we still have a problem.  Perhaps we think housing is most important. Since resources are limited, at what point does our investment in housing begin to take away from the important need for medical devices? Or for tractors, which are used to harvest the food everyone needs? Even if our intentions are pure, it would be impossible to know for sure if we are using resources in the best possible way.

To illustrate the complexity of this problem, imagine a world where this problem is perfectly solved, where we know the optimal use of every resource. To simplify the illustration, imagine there are no changes to anyone’s subjective wants, changes in technology development, changes in the total population, or changes in resource availability. If this were the case, every person would do the same tasks every day. Producers would produce the same products, in the same quantity, every day. The prices of all consumer goods and factors of production would remain constant, as neither supply nor demand ever changed.

Consequently, there would be no uncertainty about the future. There would be no need for someone to risk combining resources in a new way. There would be no reason for a business owner to invest more in one line of production, or less in another, or for anyone to take any risks or seek greater profit. Everything would already be used towards its optimal end.

It’s not difficult to see why this can only be an imaginary scenario. James cautions us against assuming that things will continue in the future as they do today.

Come now, you who say, “Today or tomorrow we will go into such and such a town and spend a year there and trade and make a profit” – yet you do not know what tomorrow will bring.

James 4:13-14

People’s subjective values change all the time. Technology changes. Population levels change. Resource availability changes. There’s always change going on. Tomorrow will not be like today. The future is uncertain.

For this reason, all entrepreneurs have the task of taking risks. No mater how successful an investment may have been in the past, or may appear today, the future will be different. An entrepreneur has no guarantee of future profitability, because prices are always changing to meet changes in supply and demand.

How Profit and Loss Solves The Problem of Resource Allocation

Since the future is uncertain, entrepreneurs must engage in the task of forecasting future prices for the factors of production and finished products. They must forecast future profitability.

For example, one farmer may forecast that there will be a beef shortage, beef prices will increase, and raising cattle will be profitable. As a result, he may raise more cows, build bigger barns, and dedicate more land towards cattle farming. On the other hand, a competing farmer may forecast that cattle prices will fall, and his time will be better spent growing fresh produce, such as corn, beans, and garden vegetables. Whichever farmer’s forecast proves to be more correct will enjoy a greater profit.

Suppose the first farmer is correct. Due to a beef shortage, prices were high, and he was able to enjoy a good profit. The following year, the other farmer may look to the first farmer’s success as a signal that he should raise cattle as well. Because of the first farmer’s profits, the beef shortage will move quickly towards a solution as more and more farmers move into cattle farming. This will continue until cattle production reaches a level where cattle farming is no longer as profitable as the next best use of the  land. As entrepreneurs seek to invest where there will be the greatest return on their investment, production shifts to meet consumer demand.

Just as important as profit is loss. By suffering a loss, the unsuccessful entrepreneur may be forced to make changes. Suppose the cattle farmer was wrong. Instead of a shortage, there was a surplus of cattle. As a result, he was not able to bring in enough revenue to cover the cost of his investment. If the farmer continues suffer loss, he will eventually have to make a change. Perhaps he will shift away from cattle farming to something more in line with consumer demand. Or perhaps he will sell the farm to another entrepreneur who will use the land more efficiently and more profitably. For instance, if there is a housing shortage, there may be a great demand to develop the land as a new neighborhood.

Profit and loss is a wonderful thing, because it communicates to entrepreneurs the most effective uses of resources allowing them to produce what people want and need. Regardless of whether the farmer is profitable, or suffers a loss, by following profit and loss signals, resources will continually be reallocated to meet consumer demand.

This process plays itself out every day, in every industry, in various ways. All over the world, entrepreneurs continually adapt to changes in people’s preferences, changes in technology, and changes in resource availability. When consumers are free to choose which products, they spend their money on, they are able to influence where entrepreneurs invest, what products are produced, and in what quantities.

Who Benefits from Profit?

Obviously, the entrepreneur who correctly forecasts future economic conditions will enjoy the reward of greater profits. But now we can see how others benefit from profit as well.

Consumers enjoy the benefit of enjoying new and better products. Because of profit, these products will become increasingly available and affordable until the market is saturated to the point where increased production is no longer profitable. As entrepreneurs seek to maximize production of profitable products, they will need to invest in the labors of others.  So not only to consumers benefit, but workers are able to earn a greater living as well. Profit and loss are signals which everyone to a greater standard of living.

A successful entrepreneur is able to earn a profit, not by cheating people, but by meeting the desires of his customers. He does this by anticipating what products they are most willing to spend money on. As they seek to earn a profit, they continually examine whether the resources at their disposal are being used in the most efficient way to meet the needs of the greatest number of people.

Obstacles to Meeting The Needs of Others

This process only works when consumers are free to choose what products they spend money on, and entrepreneurs are free to make whatever changes are necessary to earn a greater profit.

When profits are villainized, so that a portion of profits are taken through taxation, this is bad for everyone. It is bad for entrepreneurs, who receive a decreased return for their investments. As profits decrease, entrepreneurs will decrease investment in production. This hurts workers, who receive less investment for their labors. It is bad for consumers, who get less of the product that they desire.

When people call for the government to bail out industries that aren’t profitable, they prevent those resources from being recombined in more beneficial ways. When politicians protect certain jobs they like, they fail to recognize the more profitable, yet unseen jobs they destroy (see Part 2). Instead of responding to losses by making necessary changes, they will continue to waste scarce resources for products that people don’t want enough to buy.

We have the responsibility to use the limited resources as efficiently as possible to meet the needs of others. Making sure entrepreneurs are free to seek a profit, while also bearing the risk of an uncertain future, is the best way to make sure that the earth’s resources are being used in the best possible way.

Christianity and Economics, Part 3: Honest Money

Just Weights and Measures

You shall do no wrong in judgment, in measures of length or weight or quantity. You shall have just balances, just weights, a just ephah, and a just hin.

Leviticus 19:35-36

Unequal weights are an abomination to the LORD,
and false scales are not good.

Proverbs 20:23

It is not necessary to explain what unit of measurement the “ephah” or “hin” were. The point is clear: once defined, they could not be changed by individuals in the marketplace. Moses instructed the Israelites not to tamper with this constant measurement so as to defraud another person.

In Old Testament times, when an individual went to buy something, he would bring with him something valuable. At times they would have used barter (maybe trading a sack of wheat for a sheep). At other times they may have brought silver or gold as money. Either way, the use of scales and measurements were important. Their money didn’t have dollar amounts printed on it. They had to weigh out the appropriate amount.

It would have been easy for a dishonest businessman to steal from his neighbor by rigging the scales. For instance, say a man was trading one pound of wheat for a sheep. If he could make his side of the scale heavier, he might put 4/5th of a pound of wheat on the scale, and yet the scale would say that he had enough to buy the sheep. At the end of this fraudulent transaction, the thief would have the sheep plus 1/5th of a pound of wheat which rightfully belonged to his neighbor. But the law of God made it clear that tampering with the scales was wrong.

When people would bring silver or gold to the market, it became even easier for sellers to use dishonest scales. The metal money would normally be measured in weight. The dishonest man could defraud his neighbor by mixing in a less valuable metal with his gold or silver. As long as the impurity of the metal was not noticed, he could then trick his neighbor into thinking he was getting real money, when he was actually getting a watered-down version of the real thing. Meanwhile, it would appear as if the dishonest man had more money left over to buy more stuff. By diluting the silver or gold, a dishonest man could defraud anyone in the marketplace, even if the actual scales were accurate. Diluting the value of money was another form of dishonest measurement, which Isaiah specifically cites as one of the sins of unfaithful Israel when he says “Your silver has become dross” (Is. 1:22).

Why Counterfeiting is Sin

Suppose an individual in Old Testament times figured out a way to duplicate coins for himself. Perhaps he figures out a way to make coins out of cheap metal, and then coat the coin in gold so that it looks and feels like the real thing. Today we call this practice counterfeiting. In addition to breaking God’s instructions for just weights and measures, this individual is stealing. But who is the victim of the kind of theft known as counterfeiting?

The counterfeiter steals money by increasing the money supply when he spends this money in the marketplace. With each fraudulent coin he spends, he slowly dilutes the value of everyone else’s gold coins. With more money being circulated in the marketplace, goods and services cost more. Economist refer to this process as “inflation.” Counterfeiting is destructive because it slowly steals from everyone except for the counterfeiter. The counterfeiter benefits by getting to spend new money he didn’t work for, while everyone else is force to pay higher prices with the same amount of gold coins they had in the first place. For others, the cost of living simply rises and no one can provide an explanation. They are totally unaware of the counterfeiter. Counterfeiting is therefore an invisible form of theft, but it is most certainly theft and therefore breaks God’s law.

This is an important point. Counterfeiting money is not simply wrong because it breaks the laws of a country. Counterfeiting is wrong because counterfeiting breaks God’s law, regardless of the laws of a country. When sin is legalized, it is still a sin. Legal abortion is still sin. Legally recognized homosexual marriage is still sinful. If counterfeiting were legal, it would still be theft.

Thankfully, private counterfeiting has never been much of a problem in society. If anyone is caught printing new money on a private printer, the consequences are very severe. Even when private counterfeiting successfully occurs, it happens on such a small scale that the impact of the counterfeiter on the cost of living is immeasurably small.

However, when creating new money is legal, and even sanctioned by the government, this is still counterfeiting, it is still wrong, and it is detrimental to an economy.

Modern Money

In one sense, modern money has become invisible. It moves electronically from one computer to another, and does not even have a physical form. A vast majority of money used today is simply numbers in a computer on someone’s account balance. But at some point this electronic money is converted back into paper cash and coins.

If you examine a dollar bill from your wallet, you will find the words “This note is legal tender for all debts public and private.” In other words, this dollar bill is legal money. Yes, we can pay for things using checks or credit cards or Venmo, but ultimately, these can be turned back into paper dollars.

You will also find the words “Federal Reserve Note.” In other words, these paper dollars are created and distributed by the Federal Reserve, the central bank of the United States. The green piece of paper is very obviously money because it has official and authoritative images in the right places. These images indicate the full faith and strength of the United States Government.

Prior to 1957, dollar bills looked very similar to how they look today, but with a few slight differences (click here for an image). Dollars at this time contained the words “Silver Certificate.” The also included the following words: “This certifies that there is on deposit in the treasury of the United States of America… One Dollar in silver payable to the bearer on demand.”

That tiny difference is significant. To be perfectly clear, there is nothing backing modern currency. At one point in time, a United States dollar could be traded for a silver dollar on demand. But this convertibility was gradually removed. Evidence of this can be seen in coins. If you are lucky enough to find a quarter from before the year 1964, you will notice that it is made of 90% pure silver. Now days quarters are made of much cheaper metal.

Although you might find this interesting, you might also be wondering “what’s the big deal? People still accept the dollar. Just as long as people are honest, how is paper money wrong?” To be clear, there is nothing immoral with paper money, just as long as the measurement of value is held constant and just. The problem with unbacked paper money is that it can be created at almost no cost. When paper money is not backed by something of value, this enables individuals (governments, big banks, and their buddies) to enter the marketplace with newly created, counterfeit money, which is in direct opposition to what the Bible teaches about just weights and measures.

What Is the Right Quantity of Money?

Without a fixed measure of value (such as gold or silver) backing the dollar, there is no longer any limit on how much new money can be created. In 1971, Richard Nixon officially removed the dollar from the gold standard, and ever since then the supply of money created by the Federal Reserve has dramatically increased (especially in the year 2020). This new money has been literally created out of thin air. It is dishonest money that contradicts God’s prescription for honesty in trade. If this was done by a shady guy in a basement with a fancy printer, he would be thrown in jail for a very long time.

Someone might object that allowing the Federal Reserve to create money isn’t the same thing as a private individual printing up 100’s in his basement. Not only do they have the proper legal authority, but there are times of economic crisis (such as in the year 2020) when there just isn’t enough money to go around. During such times, wouldn’t there be an economic benefit to having a more elastic money supply? Can we really say that the Biblical standards for “honest money” apply in such a situation?

In other words, if new money is created legally, with only the very best intentions of creating wealth and preventing poverty, is it still wrong?

To answer this objection, imagine you had the ability to create a new can of peas out nothing (or turkeys, or watermelons, or cattle). Would this help the poor? Of course it would! The increased supply of goods per person would mean everyone can consume more, and the standard of living would go up for everyone. But creating new money provides no benefit for society at all (except for the dishonest counterfeiter).

Why not? Because money itself cannot be eaten or consumed. Money is used only as a medium of exchange. Once we have enough money for the use of exchange, no more money is needed. So while increasing the number of cattle or cars or cell phones or houses would be beneficial, increasing the supply of money only dilutes its value because there is more of it floating around.

To put it simply, if the number of cars suddenly doubled, twice as many people could own cars. But if the supply of money were doubled, the only result would be that we would have the same number of goods and services for double the price (at least on average). Now if everyone saw their bank accounts double, they might feel richer, at least in the short term, and go buy houses, vacations, or new cars. But once prices went up to compensate for the increased demand, reality would set in, and people would realize that they are not better off at all. In fact, they might be worse off because they were encouraged to buy things that they really couldn’t afford.

Counterfeiting money does more than just drive-up prices. It causes people to make foolish decisions with their money (“malinvestment” is the economic term). Dishonest money has no societal benefit at all.

Christianity and Economics, Part 2: The Parable of the Broken Window

Read Christianity and Economics, Part 1 Here: Why Christians Should Think About Economics

We must not think only about the immediate and seen effect of our choices, while failing to consider the eventual and unseen effect of our choices. This is one of the very first lessons taught in the Bible.

So when the woman saw that the tree was good for food, and that it was a delight to the eyes, and that the tree was desired to make one wise, she took of its fruit and ate, and she also gave some to her husband who was with her, and he ate.

Genesis 3:6

Eve decided to take the forbidden fruit because she desired the seen and intended consequence of her choice. That is, she could see that the tree was good for food, it looked delightful, and it would make one wise. She did not look at the fruit and think “I want to die, so I’m going to eat this fruit.” She ignored the eventual, unseen, and unintended consequences of her choice. Almost every sin imaginable (drunkenness, laziness, adultery, etc.) could be described in terms of prioritizing the seen over the unseen, the immediate over the eventual, and the intended effect over the unintended.

When applied to economics, learning to think about unseen, eventual, and unintended consequences will equip us to recognize the error of most popular economic fallacies. This point can be illustrated by the parable of the broken window. The parable was first introduced by the French economist, Frederic Bastiat, in his 1850 essay “That Which Is Seen and That Which Is Not Seen”, and was further developed the Nobel Prize winning economist Henry Hazlett in his 1946 book “Economics in One Lesson.”

The Parable of the Broken Window

There was a baker who owned a shop. One day, as mischievous kid threw a rock through the front window of the bakery. The baker was understandably upset about the broken window. But then the baker was confronted by one of his friends who encouraged him to think about the bigger picture. Since the baker now has to buy a new window, the window shop down the street will benefit from the purchase. The window shop will have to buy more materials from the glass maker and will also have to pay its workers for the extra labor. It might be that one of these workers uses his extra pay to buy a loaf of bread from the baker.

“Cheer up!” said the baker’s friend. “Not only is this act of destruction not a tragedy, but a more broken windows might be one of the best things for our town’s economy. With more broken windows, the glass store will have to hire more workers, thus creating new jobs. These new employees will eventually become new customers of all of our businesses, which will strengthen our local economy. So the broken window isn’t really a tragedy at all!”

Unfortunately, this clever friend has not told the whole story. After all, if the baker’s window had not been broken, he would have had both his window and his money, money he could have spent for something other than replacing the window. Perhaps he could have bought a new sign for his bakery. Perhaps he could have taken his wife out for a nice dinner. Perhaps he was about the give a bakery employee a raise, but now, since he has to replace the window, he will have to postpone that raise.

Although the broken window may have benefited the window store and glassmaker, their gain was a loss for the sign maker, the restaurant owner, or the bakery employee. Unfortunately, since the window was broken, we will only ever see the new window and the immediate benefit for the window shop. What will remain unseen is how the baker would have chosen to spend his money if the window had not been broken.

What this story illustrates is something economist call “opportunity costs.” The cost of the new window was not simply the dollar price of the purchase. The true cost of the window is the goods or services that the baker would have chosen to purchase if he didn’t have to replace the window. Although we can easily see that the broken window will benefit some, this benefit only comes at the unseen expense of others. In the words of Hazlitt, “The bad economist sees only what immediately strikes the eye; the good economist also looks beyond.”

Broken Windows Everywhere

Unfortunately, like the baker’s friend, many people have a hard time thinking like a good economist. They think only about the benefit they can see, that is, the immediate and intended consequences. What remains unseen is the lost opportunity cost.

For example, its not uncommon to hear people suggest that natural disasters such as hurricanes or tornados, are good for the economy. After all, it is certainly true that disasters create new jobs. Messes must be cleaned, buildings must be rebuilt, windows must be replaced. But every broken widow has a cost. It must come at the expense of those who would have benefited if there had been no disaster.

During times of war, politicians will often celebrate the creation of new jobs and the economic benefits of wartime spending, but they ignore the devastating opportunity costs suffered by those who must rebuild their destroyed property with fewer resources than they started with. It’s the broken window fallacy once again.

The same could be said for any kind of government spending. Governments are not producers, manufacturers, or bakers who offer goods and services in exchange for money. Since governments only get their money from taxpayers, government funded projects must be considered in terms of opportunity costs, that is, the inevitable economic production that was forfeited when taxpayer capital was diverted towards the government sponsored project.

For example, if a government taxes a community to build a new football stadium, it is easy for the local news media to point to a big game, and the businesses which benefit from the large crowds and say, “See! This is what your taxes paid for!” But they will never be able to place a microphone in front of the person who lost their job, or forfeited their family vacation, or had to settle for a high mileage used car because their money was taken through taxes. That’s because all the things people lost when their money was taken through taxes will forever remain unseen.

If not for the taxes, people would have that money to spend or save as they choose. People could have chosen to start new businesses, offer raises to their employees, take their wife out to a movie, give a bigger contribution at church, take their family on vacation, or start a non-profit organization. The possibilities are endless. At the end of the day, people would have chosen what they thought was the best use of the money for them and for those around them.

Every public park, public highway, government funded construction project, and public school have opportunity costs. Even government program designed with the best intentions of helping the poor must be considered in terms of the unseen and unintended opportunity costs, many of which may impact the very people the program is designed to serve. The true cost of any government sponsored project is not the dollar cost, but the best use of the money had it remained in possession of the people from whom it was taken.

Opportunity Costs in the Bible

When Israel asked for a king (1 Samuel 8), they could see the immediate benefit of having someone to fight their battles. They did not listen to Samuel’s warning that the king would only do this at the expense of their sons, their daughters, and the fruits of their own fields. That is, they were deceived into asking for a king because they did not think about the opportunity costs.

In the parable of the talents (Luke 19:11-27), the servant who received only one talent decided to forego the opportunity to create economic benefit because he buried the talent entrusted to him. Therefore the master was upset with him because of the lost opportunity cost.

That’s why it is important for Christians to think like good economists. God desires that we use the talents he has entrusted to us to serve our fellow man, and not to waste them with unproductive work. When Jesus returns, we will all be judged according to how we use God’s resources to further his kingdom. When God entrusts us with talents, we must use those gifts in a way that honors and glorifies him. We must be resourceful with our financial resources, no matter how much or how little we may have. Thinking about the seen and unseen, immediate and eventual, intended and unintended consequences of our decisions will help us to do just that.

Christianity and Economics, Part 1: Why Christians Should Think About Economics

Take care, and be on guard against all covetousness, for one’s life does not consist in the abundance of his possessions.

Luke 12:15

Proclaiming good news to the poor was at the very heart of Jesus’s mission (Lk. 4:18-19; 6:20-25). Jesus continually encouraged his disciples to be ready to give up their earthly possessions (Lk. 6:30). Jesus himself did not place confidence in his earthly possessions (Lk. 9:58, 62; 10:4). Jesus clearly warned that we cannot serve both God and money (Lk.16:13) and that it would be easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God (Lk. 18:24-25).

It’s easy to see why some might dismiss the study of economics as too worldly for a Christian, especially if they read the Bible selectively. However, one should not conclude from Jesus’s teachings that God is an anti-material ascetic. After all, God is the one who created the material world, and he is the one who called it “very good” (Gen. 1:31). It’s hard to see how we can conclude that thinking about material goods is inherently wrong when material goods are created by God.

The Bible itself is full of teachings about material goods. In Genesis 2, for example, before the fall, Adam was instructed to “work” and “keep” the garden of Eden. That means that Adam had to think about how to care for material goods. In Proverbs 6:6-11, the writer instructs us to learn from the example of an ant as it was working to make material provision for itself in the winter by gathering food in the summer. Later in Proverbs 12:11, inspired scripture affirms that material sustenance is produced by work.

The law of Moses is filled with teachings about justice for the poor (Deut. 24:5-22), how to manage earthly goods (Deut. 25:1-5), the importance of using honest weights and measures (Deut. 25:15-18) and tithing (Deut. 26),. The book of Deuteronomy concludes by promising a list of physical, material blessings if Israel is obedient (Deut. 28:1-14) , and a list of material warnings if Israel is disobedient (Deut. 28:15-18). These verses sufficiently demonstrate that God is concerned with all of our existence, including the management of material goods.

Jesus teaches us not to be anxious about physical possessions (Mt. 6:25), but rather to seek first the kingdom of God and his righteousness, then all these things will be added to you (Mt. 6:33). Notice that Jesus does not teach that things are worthless. Rather he teaches that we should not be anxious about material needs, but rather should trust that God will provide for us as we seek first his kingdom and his righteousness. Christians should not be ignorant about material goods, but as they think about material goods, they must remain committed to seeking first God’s kingdom and God’s righteousness.

What is Economics?

Contrary to popular misconceptions about the term, “economics” is not the study of money, resource allocation, or supply and demand charts. Yes, one of the most popular and practical uses of economics is to be able to explain prices – which are quoted in units of money – of various goods and services that are being sold in the marketplace. But economics is not the study of money per se.

Economics is really about solving one of the greatest problems faced by mankind, that is, the problem introduced in the first few chapters of Genesis. The first command that God gives man in the Bible is found in Genesis 1.

And God blessed them. And God said to them, “Be fruitful and multiply and fill the earth and subdue it, and have dominion over the fish of the sea and over the birds of the heavens and over every living thing that moves on the earth.”

Genesis 1:28

God wanted mankind to rule over and subdue creation. That is, they were to take creation from it’s wild, unsubdued state, and tame it into a state that suits our needs and glorifies God. However, with the fall of man as recorded in Genesis 3, this mission became much more difficult.

Cursed is the ground because of you;
in pain you shall eat of it all the days of your life;
thorns and thistles is shall bring forth for you;
and you shall eat the plants of the field.
By the sweat of your face
you shall eat bread

Genesis 3:17-19

This leaves us with one of mankind’s greatest problems. How do we have dominion over this world’s scarce goods without starving to death, killing one another, or both? Learning to think economically help us greatly as we attempt to answer this question.

Economics can be defined as the study of human choices and actions. This includes the study of why businesses are run in a particular way, why the stock market goes up and down, and how oppressive government policies can hurt the poor. But economics also studies cases of simple human interactions, where two people may choose to exchange goods or services directly with each other without using money at all (that is, “barter”).

There are indications in Scripture that humans were designed to interact with one another from the beginning. In creation, God said “It is not good that man should be alone” (Gen. 2:18). From the very beginning the Bible indicates that Adam would have to have someone to help him in fulfilling his mission. This general principle is affirmed in the book of Ecclesiastes.

Two are better than one, because they have a good reward for their toil.

Ecclesiastes 4:9

The church itself is founded upon the principle of people working together. Christians are commanded to assemble together, and encourage one another (Heb. 10:25). In 1 Corinthians 12, Paul teaches about the church being made up of many different people with different gifts and qualities that are all designed to function together.

There are two basic ways for humans to divide up material possessions among themselves. One is by theft and violence. That is, if you have something I want, I could just take it. The other is by voluntary cooperation. That is, you may choose to gift me what I want, or we could voluntarily agree to exchange goods or services.

Not only does the study of economics verify that the second type of exchange leads to more prosperity, but the study of God’s word shows that it also facilitates loving relationships among mankind. When God commands us not to kill, steal, or covet, he teaches us that there is a right and wrong way to interact with one another. The study of economics shows that keeping the commands of the creator is the most effective way to manage the physical resources that he has given us. Or as the book of Proverbs puts it, “The fear of the Lord is the beginning of wisdom” (Prov. 1:7). If we want to prosper in fulfilling God’s command to have dominion over creation in a way that facilitates love for God and love for our fellow man, we dare not ignore what can be learned from thinking about economics.

Introduction to the Christianity and Economics Series

What will follow in this series is not a Bible study. I’m writing with the assumption that Christians understand that the love of money is the root of all evil. I’m assuming that Christians understand the importance of taking care of the poor. I’m assuming that Christians recognize the dangers of laying up treasures on earth. I am not writing this to in any way encourage Christians to prioritize earthly treasures over heavenly treasures.

The purpose of this series is to simply discuss a few basic economic laws, that is, a few basic truths about the world that can be deducted simply from observing that people were created in God’s image with the ability to make choices. Since economics verifies what we are taught in scripture about the management of material goods, I hope to use this series to glorify God for his great wisdom. Since Christians are to love others, my hope is that these articles will help Christians to understand how to more effectively serve others in ways that many non-economic thinkers may miss. I also believe that understanding a few basic economic laws can help us to see through some of the ways that the Devil tries to deceive Christians into thinking they can accomplish good without submitting to what scripture teaches about material goods. I have no interest in debating various government policies from a left vs. right political paradigm. My concern is simply to point out a few basic principles that can be universally recognized regardless of political leanings.

My hope is that this series will help more Christians to recognize a few basic patterns in human behavior, so as to develop a deeper understanding of God’s creation. By so doing, I hope to encourage a deeper respect for God’s wisdom as we make decisions about everything from evaluating grand political ideas, to doing mundane household activities, to helping the church serve the poor in their communities more effectively.