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.

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

On November 24, 2022November 24, 2022 By Tyler BoydIn Economics, Uncategorized2 Comments

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.