Kruse Kronicle

Economic Fallacies: "No Scarcity"

Look at almost any textbook on economics and you will find a definition of economics similar to this one in Greg Mankiw’s Principles of Economics:

“Economics is the study of how society manages its scarce resources.” (Mankiw, 4)

This seems straightforward enough to most economists but many theologians take exception to this characterization. For instance, Douglas Meeks writes:

Christianity will therefore be subversive in calling into question the deepest assumption of modern economics, namely scarcity. Nothing is deeper in the spirit of capitalism, and of socialism as well, than the belief that there is not enough to go around. (Meeks, 171)

What the market mechanisms actually require is scarcity in the sense of blocked access to what people need for livelihood and work. Scarcity in this sense is the conditions for exclusive private property. (Meeks, 172)

Scarcity may not be made the starting point of a system of economic justice. As a starting point, scarcity is an illusion. In almost all situations of human life scarcity has been caused by human injustice. (Meeks, 174)

Scarcity is portrayed as a fiction perpetrated on the public to foster a sense of need in service of a consumerist society. But is this what economists mean by scarcity?

When you awoke this morning you likely charted out a set of activities you would do today. In choosing to arise at 6:00 a.m. you chose not to arise at 5:00 or 7:00. In eating your Cheerios, you chose not to fix scrambled eggs or make waffles. In choosing to go to work you chose not to play golf, go shopping, or rob a bank. This highlights a fundamental reality of human existence: We have a limited number of hours in each day and a limited number of days in our lives. Time is a scarce resource that forces as to choose between competing options.

It is true that God created and placed us in a world of abundant resources. But very few resources exist in a state usable by human beings. Energy, technology, and intelligence must be applied to resources to transform them from less useful states into more useful states. Houses, appliances, clothes, cars, and nearly everything else we use do not exist in such a way we can just go pick them off trees. Most of our food production requires careful management of soil and the application of farming techniques in order to produce an abundance of food. This is part and parcel of the biblical notion of stewardship as God placed Adam in the garden to work it so that if might produce abundance.

At the core of the “no scarcity” fallacy is blindness to issue of production. It views economics purely in terms of distribution of goods and just assumes material goods exist. If material goods just hung from trees for our picking, then maybe the case could be made for communal ownership and sharing with each other (but even then it won’t work as we will see below.) But the reality is that there are a set number of human beings, energy resources, and technological tools to be used on any given day for any given society. How should these scarce resources be employed at this moment?

This is the function of markets. Needs and wants of any given society are shifting by the nano-second. Economies are dynamic living organisms. There is no way any individual or group of experts can plan or manage the production process. Without price information, no one has a clue how much of anything to produce. Severe shortage for some things and wasteful overproduction of others is the consequence. The price mechanism provides a real-time feedback loop between society and producers that effectively allocates society’s resources according to society’s demands, much like the nerve network of a human body. It is an imperfect system that is only as just as the purchase decisions of the individual members of society. Government regulation is needed to improve justice with regard to externalities (i.e. consequences experienced by individuals not a party to a given economic transaction) and benevolence practiced by citizens toward each other is critical to a just and prosperous society, but there is no replacement for the feedback loop of markets.

We also need to say more about private ownership in managing scarcity. Earlier in this series I wrote about “the tragedy of the commons.” This concept has been understood at least as far back as the Greeks. Nineteenth Century demographer William Lloyd gave the most popular example this concept using the idea of multiple herders owning grazing land in common.

From this point, Hardin switches to non-technical or resource management solutions to population and resource problems. As a means of illustrating these, he introduces a hypothetical example of a pasture shared by local herders. The herders are assumed to wish to maximize their yield, and so will increase their herd size whenever possible. The utility of each additional animal has both a positive and negative component:

• Positive: the herder receives all of the proceeds from each additional animal.
• Negative: the pasture is slightly degraded by each additional animal.

Crucially, the division of these costs and benefits are unequal: the individual herder gains all of the advantage, but the disadvantage is shared among all herders using the pasture. Consequently, for an individual herder weighing these, the rational course of action is to add an extra animal. And another, and another. However, since all herders reach the same rational conclusion, overgrazing and degradation of the pasture is its long-term fate. Nonetheless, the rational response for an individual remains the same at every stage, since the gain is always greater to each herder than the individual share of the distributed cost. The overgrazing cost here is an example of an externality. (Wikipedia)

By contrast, when herders own their own herds and land they have incentive to preserve and protect the two in relationship to each other. Property rights and private ownership foster sound management of resources.

We also need to appreciate that while private ownership is not absolute, neither is it a privilege granted or withdrawn at the whims of the state. It is prevalent among many today to see society as a collective (like a family or a corporation) where we meet one part of societies needs by simply reallocating “our” resources elsewhere. This is a seductive and dangerous mindset that collapses all human justice into utilitarian issues of the collective good. The state replaces the family as the elemental institution of social cooperation supported by other institutions playing a subsidiary role. Life, liberty, and property are inextricably connected and whenever one is subjected to utilitarian government whims, they all fall. There is biblical warrant for seeing these basic human dignities in just this way, although it is framed within the larger context of stewardship before God, not in terms Enlightenment self-actualization.

Finally, we need to revisit again why trade is so essential. Jay Richards in his talk on Economic Myths uses the example of “The Trading Game." Richards describes his experience playing the game in the sixth grade. Each student was randomly handed an item of approximately the same value. Each student was instructed to rate how much they valued what they had received from 1 to 10 with 10 being the highest value. Richards received Barbie trading cards, which he ranked as a 1. Then the students were placed in groups of five and allowed to trade with each other. Richards found a girl with a paddle-ball and they traded to each other’s satisfaction. The students recorded their values again. Finally, they were allowed to trade with anyone else in the room. When the trading was finished, the students wrote down the value of the item now in their possession.

If you added up the students' ratings at the start of the game and compared them to the sum of the students' ratings at the end of the first trade, you would find that the sum for the class was higher than it was at the beginning. The sum would be higher still after the second round of trade. Furthermore, no one would have an item of lesser value at the end of the game than the one they started with. There were rules to these market exchanges. There was no theft or intimidation so there was no way to go lower than the value of the starting item. Often in these games, everyone’s value goes at least a little higher.

Therefore, scarcity is not an illusion or a cynical fabrication. It is real. We are finite human beings with limited time, energy, and technology to deploy in transforming abundant resources from less usable states to more usable states. Property rights, private ownership, the price mechanism of markets, trade, family, subsidiarity, and widely practiced benevolence are the recipe for how we overcome scarcity, participating with God as stewards in creating an abundance in which all participate.

Sources:

N. Gregory Mankiw. Principles of Economics, 3rd Edition. Mason, OH: Thomson South-Western, 2004.

M. Douglas Meeks. God the Economist: The Doctrine of God and Political Economy. Minneapolis, MN: Fortress Press, 1989.

[Index]

Economic Fallacies Christians Believe (Index)

For an index to the Economic Fallacies Christians Believe series CLICK HERE.

Economic Falacies: Price Equals Importance

The “Pay Equals Importance” fallacy maintains that the wages and salaries people are paid should be commensurate with the importance of the work they do.

People frequently deplore the fact that school teachers make so little money but a famous basketball player like Kobe Bryant makes 30 million dollars a year (including endorsements, etc.). After all, teaching our children is far more important than playing a game. I don’t think there is any question in most people’s minds that teaching children is more important. The trouble comes in assuming that remuneration is based on the importance of the work done.

Think about another realm of economic activity. How important to you is air? I think we would agree that it is absolutely essential. More than a minute or two without air and we die. But how much will your next breath cost? Nothing. That doesn’t mean it isn’t important.

Conversely, how important is a diamond? Sure, we might all like to have a diamond but is it important to have? Will we die without it? No. Yet we spend thousands of dollars on a diamond. Does that mean a diamond is more important than air? Not at all.

The issue we are dealing with here is what economists call marginality. There is no intrinsic price for of a breath of air or for of a diamond. Price is determined by the supply relative to demand. The question is, what will it cost to secure the next unit on top of the previous units already consumed? (Or what is the cost of my purchase at the margin (marginality) of what has already been purchased?) Air is so plentiful that there is no cost attached to my next breath. Yet to secure the next diamond requires a major investment of time, capital, labor, and other resources to extract it from the earth. Alternatively, I can make offers for other diamonds already in circulation. Either way, the cost of the next diamond at the margin is very high.

Returning to our school teacher versus Kobe Bryant example, what is the economic value of the next teacher we might wish to hire versus the economic value of the next Kobe Bryant we might want to hire? The number of people with an aptitude for teaching is many thousands. The number of people who can play basketball at Kobe Bryant’s level might be counted on one hand. Therefore, since teachers are much more plentiful, the next teacher will command a much lower salary than will our scarce star athlete. This says absolutely nothing about the importance of the work they do.

I’m not making any judgments here about placing such a high demand on basketball talent anymore than I am about valuing highly compressed lumps of carbon (diamonds), the ability to place paint exquisitely on a canvass, or being able to play a character in a movie. The central issue is that societal importance of task is not the determining factor of economic value. Supply relative to demand is.

[Index]

Economic Fallacies: "Living Wage"

The "living wage" fallacy says that businesses are morally obliged to pay workers a wage that will sustain their lives.

The idea of an obligatory living wage is anachronistic superimposition of feudalism upon a modern exchange economy. Serfs had no mobility and no choice but to take what the lord was giving them. A living wage was due the serf from the lord. The lord had total control over the lives of his workers.

In an exchange economy, workers have mobility. Workers can take their labor to other employers who will pay more. In contrast to the lord, the employer does not have total control of a worker’s livelihood. The employer’s sphere of activity, in comparison to the lord, is limited to effectively organizing the means of production to efficiently produce goods and services, thus creating wealth and opportunities for employment. The worker is a free agent who serves the employer only under the very limited terms of contractual agreement for the business enterprise. The employer does not have the obligation for the workers material provision nor does the employee have any obligation to the employer beyond the contractual work agreement. The employer is responsible for paying a just wage (not living wage) freely negotiated between non-coerced parties. It is incumbent upon workers to develop skills and experience for exchange in the marketplace that will sufficiently cover material needs.

We know there are some in society who are incapacitated or otherwise unable to earn a living wage. Society is responsible for taking care of the poor. Compassion and mercy need to be extended to those lacking sufficient resources to exchange in the marketplace but that comes from outside the economic calculation of a business contract (and employers are often among those extending compassion and mercy from their own financial resources.) Government taxation for certain kinds of support may be part of the solution. Strong families, churches, and voluntary associations are critical. Business is one institution within society but it is not the function of businesses to sustain workers lives. “Business” is not a synonym for “society,” nor are businesses feudal lords.

This is not to say that sorting out justice and compassion issues are always simple. Migrant workers go to work for large agricultural enterprises. Their wages are well below what most Americans would settle for in pay. Yet many of these workers endure great hardships, leaving homes and families, in order to earn this low wage. This should tell us something about the conditions migrant workers are leaving in order to take advantage of these low wages. These people were not forcibly dragged into the fields and made to work. They see these low wages as an economic opportunity.

However, that is not to say that these workers are necessarily truly free agents. Should they have difficulties or should their employer become abusive, they have no financial reserves and no local support network. Many may be in the country illegally. They are in a highly vulnerable situation. Therefore, workers are reluctant to involve governmental entities. They will endure many injustices instead. Corporations and growers can easily be tempted to use these circumstances to the detriment of workers. My intention is not to minimize the difficulties of such complex justice questions but rather to suggest that predicating justice on feudal concepts of living wage is not a helpful place to begin.

Here is a scenario that helps make a point about just wages. You want to keep your lawn mowed and trimmed. Two men, approximately twenty-five years old present themselves to you as yard care workers. Based on what you have been able to determine, these two men have equivalent skills, experience, and reliability. They provide the same quality of work in the same amount of time. You check around and find that most yard care folks of their quality in your area charge $10-$12 per hour.

Now the US poverty rate for a single adult is $9,973 ($5.00 per hr.) and $26,683 ($13.35 per hr.) for a family of six. In our scenario, the first man is single with no dependents. Allowing for overhead and other expenses, he needs a wage of $7.50 to net the poverty wage of $5.00 an hour ($5.00 wage plus $2.50 per hour for overhead). He offers to work for $10 an hour. The second man is married with four children. Allowing for overhead and other expenses he needs a wage of $15.85 to net the poverty wage of $13.35 an hour (plus $2.50 per hour for overhead). He offers to work for $16 an hour.

1. Man 1: $10.00 = Single man
2. Man 2: $16.00 = Married man with four kids

Which of these two men are you going to hire? The overwhelming majority of us are going to hire the first man. Why? Because we are heartless evil capitalists, callous to the plight of the second man? No. Because we determine wages and prices based on the value of the services rendered, not on the need of the person rendering the service.

The market signal to man number two is that he needs to pursue other options in order to make a better living. If government intervenes in the market to set a minimum living wage at $16.00 so that a family with four children can earn an above poverty income, then that signal is muted, distorting the decisions people make. Furthermore, what are you and your neighbors actually going to do? Many will opt to cut their lawns themselves. Some will hire neighbor kids and pay them under the table. Others will opt to cut their grass less frequently and skimp on trimming. The demand for the service will drop. The handful of yard care folks who manage to stay in the market will benefit from the mandate, but many of those who could have been working at $10-12 hour will now be without a job making the poverty situation worse.

Society (of which business is one institution) must have poverty reduction as its mission. But society consists of families, neighborhoods, informal networks, churches, education institutions, voluntary associations, businesses and governments. When people are incapacitated from providing for themselves, society needs to provide for folks through its array of institutions. When able bodied people experience a gap between what they earn and what they need to be beyond poverty, society with its array of institutions (of which business is one institution) works to help them eliminate that gap. Again, the contribution of business is to effectively organize means of production to efficiently produce goods and services, thus creating wealth and opportunities for employment. Businesses are obligated to pay a just wage, which is whatever wage two non-coerced parties agree to. If the wage is insufficient for living, then society (an array of institutions) must endeavor to help that person develop the wherewithal to close that gap.

The living wage places the sole responsibility of closing the gap on employers. Why? What is the rationale? Why should employers be singled out as the gap closers instead of society? When you and I hire lawn care workers we determine wages and prices based on the value of the services rendered not on the need of the person rendering the service. Why do we then want to mandate that businesses pay workers more than the value of the services rendered, thus distorting the market by sending false singles to workers about the value of their work and destroying jobs in the process? Forcing employers to pay more than services rendered is state mandated “charity” except that in the traditional sense, charity is freely chosen act.

There is no biblical or ethical mandate that requires business alone to shoulder the responsibility for meeting employee’s economic needs.

[Index]

Economic Fallacies: Final Thoughts and Index

We have come to the end of post on economic fallacies Christians believe. These ten are among the ones I most frequently encounter in conversations and writing. I hope these all made sense. But my question to you is, What fallacies did I miss? Any suggestions? In the days ahead I may add more to this series but I think this is pretty good start. Here is an index of the posts.

Introduction

Economic Fallacies Christians Believe

Fallacies

Work is Instrumental Fallacy

The "Work is Instrumental" fallacy views human economic labor as purely instrumental in service to higher pursuits of spirituality and intellect.

Biblical Redistribution Fallacy

The Biblical Redistribution fallacy identifies wealth equalization as the primary economic concern of the Bible, the Jubilee Code of Leviticus 25 being the most exemplary passage.

Piety Fallacy

The Piety fallacy is uncritical action based on pietistic interpretations of scripture without regard to actual outcomes resulting from those actions.

New Creation Now Fallacy

The “New Creation Now” fallacy holds the we can create “heaven on earth” while disregarding the reality that the New Creation can not be fully realized until Christ's return.

Zero-Sum Game Fallacy

The Zero-Sum Game Fallacy views wealth as a fixed quantity meaning the only way someone gets wealthy is at someone else’s expense.

Linear Projection Fallacy

The Linear Projection Fallacy projects present circumstances and trends endlessly into the future without allowing for innovation and societal change.

Free Markets Equals Lawlessness Fallacy

The “'Free Markets' Equals Lawlessness” fallacy understands free markets as markets without any restriction on the activities of individuals or corporations.

Capitalism Based on Greed Fallacy

The “Capitalism Based on Greed” fallacy says that greed and selfishness are inherent in capitalism.

Free Markets Destroy the Environment Fallacy

The “Free Markets Destroy the Environment” fallacy argues that free markets and capitalism are destroying the environment as they exhaust global resources.

Government Equals Society Fallacy

The "Government Equals Society" fallacy views government as the means by which society acts.

UPDATES:

Living Wage Fallacy

The "living wage" fallacy says that businesses are morally obliged to pay workers a wage that will sustain their lives.

Pay Equals Importance Fallacy

The “Pay Equals Importance” fallacy maintains that wages and salaries people are paid should be commensurate with the importance of the work they do.

No Scarcity Fallacy

The "No Scarcity" fallacy maintains that God created an abundance of resources for humanity and that any scarcity is related to unjust social systems.

[Index]

Economic Fallacies: "Government Equals Society"

The "Government Equals Society" fallacy views government as the means by which society acts.

Frequently we hear that society has a responsibility to the poor. Most Christians of all stripes would agree. But listen to the sentence that often follows such a declaration. It goes something like this, “Therefore, ‘society’ should raise the minimum wage, grant universal healthcare, and redistribute wealth through taxation.” Notice the common theme. They are all government imposed solutions. Why not respond, “Therefore, ‘society’ should find ways to create stable families, get churches and volunteer organizations involved in the lives of the poor, and lend money to the poor through microenterprise funds.” This isn’t an “either/or” proposition. Rather it highlights that the default solutions for too many Christians: Government. Non-governmental non-bureaucratic solutions are an afterthought, secondary in importance, if they come to mind at all. This is the functional equivalent of saying “government” is “society.”

In reality, government is only one institution of society. Society includes individuals. It includes other institutions like the family, churches, volunteer organizations, businesses, and a variety of local governments. It includes countless informal networks. Society is much broader than government.

At the core of the Old Testament notion of justice and care in society was the family. The family was encompassed by a clan, then by a tribe, and then by the nation. Each succeeding level of distance from the family played ever more limited roles in the daily operations of the family.

This was in contrast to Greco-Roman views of the family where the family existed at the pleasure of the state to serve the state. Judeo-Christian ethics came to define the family as an inviolable institution apart from the state. The institution of the family is the only institution established by God prior to humanity’s rebellion. According to the biblical narrative:

“Therefore a man leaves his father and his mother and clings to his wife, and they become one flesh.” Genesis 2:24

There is a union of two different but complementary individuals. Physically they become one through the act of sexual intercourse but there is a process of becoming intimate at other levels as well. “Two becoming one” has both physical and non-physical expressions inextricably tied together. Marriage is a covenant that makes the establishment of this unity possible. One frequent consequence of this covenantal unity is the birth of children. The institution of the family, established by the covenant of marriage, creates boundaries for unity to develop and it provides a stable nurturing environment for childrearing by those who know each child the best and are committed to the child’s personal welfare.

Roman Catholicism has framed this family centric understanding of societal institutions in terms of subsidiarity. Sudsidarity, first articulated by Pope Leo XIII in his 1891 encyclical Rerum Novarum, teaches that problems should be addressed at the most localized level possible. The most local and immediate institution to an individual is the family. Intermediate institutions like the church, voluntary organizations, and local government have a subsidiary function serving individuals and families in ways families can’t serve themselves. Beyond these intermediate institutions are marco-institutions like national governments and international bodies. These fulfill a subsidiary function to individuals, families, and intermediate institutions. Rather than families existing at the pleasure of the state, the state exists in support of the families and the individuals within them.

Within Reformed circles, a similar conception has emerged called sphere sovereignty, articulated by Dutch leader Abraham Kuyper (1837-1920). Kuyper talked in terms of societal spheres that were distinct but interconnected. Government, economics, education and the family are a few examples societal spheres. No sphere is sovereign over the others and each must be respected. He thereby rejected the ideas of popular sovereignty (rights arise from individuals) and state-sovereignty (rights are derived from the state.) Thus, when we look at societal problems we must investigate what the problem means for each sphere of life and strategize accordingly.

Christian thinking in America has too often drifted toward the two types of sovereignty Kuyper found so dangerous. One the one hand there is an attachment to libertarian strain of thinking that emphasizes personal freedom to the point disdaining all tradition and values. The family and subsidiary institutions at all levels are obstacles to personal freedom. On the other hand, there is state sovereignty where the state is viewed as paramount with all other institutions playing a supporting role to the state. The state is the default option and the lead player in addressing problems. The Family, as well as subsidiary institutions at the intermediate and macro level, are obstacles to state sovereignty.

The debate over same-sex marriage is an illustrative display of the outworking of these two Modernist views on sovereignty over the last century. Miroslav Volf notes in Exclusion and Embrace, that a covenant is an indefeasible commitment that contemplates perseverance through open-ended and diverse circumstances. A contract is performance oriented with limited commitment related to performance. (148-150)

The family has been understood as an inviolable institution apart from the state, founded in a covenant between to complementary human beings (male and female.) But marriage and family have gone from being a covenantal social institution established by God to being a contractual arrangement for personal fulfillment. Rather than being in a covenantal institution to which one conforms, marriage and family has become a contractual arrangement made to conform to the performance wishes of parties involved.

For the first time in human history we are divorcing sexual intercourse and its procreation implications from the concept of marriage. Sexual intercourse is being replaced by any form of mutual sexual stimulation by consenting adults or no sexual relationship at all.  The marriage of a husband and wife, potentially procreating to form a family, is on the verge of no longer being an inviolable institution but a contractual option that exists at the pleasure of the state to be defined by the state however it suits the state’s purposes.

This is good news for many libertarians because we are less constrained by the restrictions marriage and family place on personal freedom. It is good news for the state sovereignty folks because it gives the state greater power to shape and direct the lives of individuals, especially children, without interference from the family. Ultimately the path leads to a condition where families, by whatever contractual arrangement is devised by the state, become nannies for the state’s children.

Many Christians today recoil from excessive individualism and believe we need to look at things from a societal perspective. But when we resist libertarian individualism with a mindset that functionally equates “government” with “society,” we merely exchange one poison for another. Biblical reflection on social issues, including economic questions, requires us to think holistically and organically with an eye toward addressing problems at the right level within the right sphere. “Government” is not a synonym for “society.”

[Index]

Economic Fallacies: Free Markets Destroy the Environment

The “Free Markets Destroy the Environment” fallacy argues that free markets and capitalism are destroying the environment as they exhaust global resources.

Earlier in this series I made the observation that the material world is both the object of human work and the human habitat. The Bible teaches us that nature is good but incomplete. Humanity is called to be co-creators with God in bringing the created order to completion. If by “destroy the environment” we mean any human alteration of nature, then much like in the movie “the Matrix” we have defined humanity as a virus. Human beings are part of nature and they have an impact upon the world. The Bible has humanity as part of the eco-system but we are also stewards over creation. Wasteful destruction of resources by stewards is disobedience to the master stewards serve. Therefore, neither pristine preservation nor wanton destruction is part of Biblical stewardship. So what can we say about markets and the environment?

First, we need to deal with the widely presumed notion that we are exhausting the earths resources. We are not. Commodities prices factor in present and anticipated future demand combined with estimated reserves. If a commodity is getting scarcer in relationship to demand, then the price of that commodity will rise. I present once again the conclusion of a study presented to the IMF in 2001:

“Using the longest dataset publicly available (The Economist’s index of industrial commodity prices), we analyze the behavior of real commodity prices over the period 1862-99, and have two main findings. First, while there has been a downward trend in real commodity prices of 1.3 percent per year over the last 140 years, little support is found for a break in the long-run trend decline in commodity prices. …” (The Long-Run Behavior of Commodity Prices: Small Trends and Big Variability by Paul Cashin and John C. McDermott, International Monetary Fund.)

As resources become scarcer, the price will rise. People will begin to find ways to use less of the commodity, to recycle, or to find more plentiful substitutes (renewable resources being the most desirable.) Markets are an economic eco-system that directs us toward sustainable growth. Present global economic growth is easily sustainable for populations well beyond our present worldwide levels. When resources become an issue, we have markets to signal a problem. Because of constant innovation and ever improving productivity we simply can’t project today’s usage into the future and say we are depleting resources for future generations.

Second, we must be cognizant of the “tragedy of the commons.” This concept has been understood at least as far back as the Greeks. Nineteenth Century demographer William Lloyd gave the most popular example this concept using the idea of multiple herders owning grazing land in common.

From this point, Hardin switches to non-technical or resource management solutions to population and resource problems. As a means of illustrating these, he introduces a hypothetical example of a pasture shared by local herders. The herders are assumed to wish to maximize their yield, and so will increase their herd size whenever possible. The utility of each additional animal has both a positive and negative component:

• Positive: the herder receives all of the proceeds from each additional animal.
• Negative: the pasture is slightly degraded by each additional animal.

Crucially, the division of these costs and benefits are unequal: the individual herder gains all of the advantage, but the disadvantage is shared among all herders using the pasture. Consequently, for an individual herder weighing these, the rational course of action is to add an extra animal. And another, and another. However, since all herders reach the same rational conclusion, overgrazing and degradation of the pasture is its long-term fate. Nonetheless, the rational response for an individual remains the same at every stage, since the gain is always greater to each herder than the individual share of the distributed cost. The overgrazing cost here is an example of an externality. (Wikipedia)

By contrast, when herders own their own herds and land they have incentive to preserve and protect the two in relationship to each other. Property rights and private ownership foster sound management of resources.

Property rights also allow owners to protect their property from devaluation by others. Without a clear title to private property (as is the case in most developing nations), on what basis does someone downstream from a major polluter along a river bring remedial forces to bear on the polluter? They can’t. Costa Rica has come up with an innovative market solution for protecting their eco-system. The have set aside a large percentage of their land area as reserve, essentially holding it in trust for the people, and begun offering eco-tourism packages. This land, now removed from the commons, generates considerable income for the nation and gives people the incentive to respect the property because they want the income to continue.

It is alleged that free markets leads to environmental exploitation. But if we look at nations with free markets and property rights we find they are the least polluted and best cared for nations on the planet. The worst environmental degradation is seen in two other types of societies.

The first place we see environmental exploitation is in the former Soviet Bloc nations. Government bureaucracies made decisions to sacrifice environmental protection for the sake of economic expansion creating some the most toxic air, soil, and water conditions on the face of the planet. Individual property rights were weak or nonexistent, leaving the populace with little recourse against the externalities of the government's policies. Had their been strong rule of law and democratic freedoms, the environment would be in a far better state than it is at present.

The second place we see environmental problems is in developing nations. People who are living hand-to-mouth have are not concerned about the environment. Deforestation for construction, firewood, or to make room for more crops is critical to survival. Environmental protection is a luxury. Several years ago a World Bank study suggested that pollution per capita rises as per capita annual income rises into the $3,000-4,000 range. Beyond that, per capita pollution goes into decline. At that level, most people have met basic survival needs and they can begin to focus on other issues. With rising wealth, they now have more to lose. They begin to insist on rule of law and greater say in political decisions. With greater protection of property rights comes greater prosperity. With greater prosperity come better institutions and more resources for addressing environmental concerns.

The environmental exploitation of some developing nations by large corporate entities is not a function of the free market system but rather the lack of such a system. Because the developing nation is without a market system with a strong juridical framework there is no way local inhabitants can protect themselves. Complicating matters are differing societal standards of what constitutes environmental abuse. What appears to Westerners as abuse of a developing nation’s environment may be considered an utter irrelevancy by people living at bare subsistence. According to a recent Pew study, substantial majorities of people in most developing nations have a favorable view of foreign corporations in their country. It often appears that many from developed nations have greater concerns about the environment in poor nations than the residents of the poor nations do.

It is not my intention to make excuses for environmental exploitation. There are corporate abuses. Rather I wish to point out that what constitutes exploitation is not as straightforward as it seems. What does seem apparent is that greater prosperity combined with an effective property rights system and rule of law lead to greater care for the environment.

Finally, we turn to pollution in economically advanced nations. Pollution per capita has been in decline for decades. Right now fossil fuel emissions from power plants, factories, and vehicles are of great concern. Regardless of what credence should be given to the impact of human generated carbon dioxide into the air we know without a doubt the fossil fuels put toxic substances in the air. Renewable less toxic sources of power would be an environmental improvement, particularly as the economies in developing nations grow (not to mention the geopolitical advantage of taking petro-dollars out of the hands of rouge nations). But it is unjust to claim that because we can now see the consequences of fossil fuel technologies, that those who first brought these technologies into existence were malevolent people out to exploit the environment. Each advance in technology brings latent and unintended consequences into existence that must be addressed.

Thankfully, free markets give entrepreneurs the freedom, the incentive, and the access to resources to innovate solutions to new problems. As environmental concern is feed into the marketplace, markets can do their magic in accessing and mobilizing human creativity for solutions.

Markets don’t destroy the environment. Poverty, lack of property rights, and insufficient rule of law destroy the environment. There is no impending exhaustion of natural resources and innovation through markets holds greatest promise of rectifying the problems of pollution.

[Index]

Economic Fallacies: "Capitalism Based on Greed"

The “Capitalism Based on Greed” fallacy says that greed and selfishness are inherent in capitalism.

The assertion that capitalism is based on greed and selfishness is one of the most common fallacies. There are many layers to this fallacy but the first thing we must acknowledge is that greed does exist within capitalism, just as it does in every human economic system! Greed extends all the way back to Adam and Eve exiting the Garden. Furthermore, greed is not confined to the wealthy. It exists among all classes of people and it always has. Greed is a given concerning the human condition until Christ returns. But is it the basis for capitalism?

Capitalism gradually emerged in Europe over several centuries. Many factors led to its development. New crop rotation methods created a boom in agriculture production more than a millennium ago. Monasteries, who owned vast tracts of lands, put these new methods to work. Their strong work ethic combined with these improvements created an agricultural surplus, freeing some for work other than subsistence labor. As the monks prospered, markets began to form around monasteries. Merchants moved close by and sought trade with the monks and other merchants. Cities eventually sprang up around these markets. New methods of international business sprang up with the Knights Templar as they facilitated pilgrimages to and from the Holy Land. Beginning in the 13th century the Medici family in Italy founded a banking system that encompassed all of Europe. Double-entry bookkeeping was invented. Greater and greater precision was developed in monitoring and analyzing production and trade.

By the 18th century Adam Smith identified key elements that were contributing to the expansion of wealth in Europe. Just like Darwin synthesized observations about biology into a coherent model, Smith did the same for economics. At the core of his analysis were the ideas of labor specialization and trade.

Rather than have each individual develop a myriad of skills to provide for all the things he needed in life, Smith observed that each individual should specialize in those activities he does best. He should pay others to do those tasks he does less well. This would result in all work being done at the best quality and with the most efficiency. (Smith expanded this idea to trade between nations with nations each specializing in specific goods. This is at he core of the compartive advantage model.)

I exchange my goods with you (which I produced at better quality and more efficiently than you could) for the goods you produced at better quality and efficiency than I could. Because we each have specialized in our labor, we are able to produce our respective goods at low cost. We sell them for more than it cost to make them, but for less than what it is worth for the buyer to make them herself (otherwise the buyer would make her own.) If I’ve made 100 tables and you've made 100 plows, then we can each exchange our excess products. One of my tables is going to be worth more to you than it is to me and one of your plows is going to be worth more to me than it is to you. We each win in the exchange and wealth is created purely by the exchange. (See the “Trading Game” example I wrote of earlier in the Zero-Sum Game post.) Money faciliates these transactions so that we are technically swaping goods directly. The kewy point is that specialization and trade, results in endless win-win transactions. Endless win-win transactions are the basis of capitalism, not greed.

Profit is another word disparaged by critics. The difference between what it cost the producer to create the good and what the buyer paid for the good is the profit. Many people falsely characterize profit as greed because the seller gets more for something than it cost the seller to make.

First, no item on the face of the planet has intrinsic economic value. Economic value is whatever amount someone is willing and able to pay. If a non-coerced buyer with (relatively) complete information chooses to buy a product for more than it cost the producer to make the product, then that is the economic value of the product.

Second, profit is a premium paid to the seller for the risk the seller took in brining the product to market. It serves as an incentive to do more of the same. A portion of the profit may be extracted by the seller for personal consumption but most businesses and corporations use the profits to improve and expand production, generating more wealth, jobs, and profits. Any producer focused exclusively on profit will ultimately collapse because of inattention to customers. But if there is no profit the enterprise will die as well. Profits are to business what food is to the body. They are essential but not the ultimate purpose for existence. Set the price to high and buyers will not buy. Set the price to low and production costs will not be covered. Sellers can not go out and charge what they please just because they are greedy.

Yet another layer to the “Capitalism Based on Greed” fallacy is the widespread misconception that, dating back to Adam Smith in the 18th century, capitalism has been explicitly based on selfishness. Adam Smith wrote two major works that must be treated as a unit: Theory of Moral Sentiments (1759) and The Wealth of Nations (1776). Smith never affirmed selfishness. He did affirm appealing to the self-love or self interest of others (terms he used interchangeably.) Selfishness excludes concern for the other while self-interest/love can incorporate concern for others. In Theory of Moral Sentiments, Smith makes explicit use of Jesus admonition to “love others as you love yourself.” In The Wealth of Nations we find this famous but widely misunderstood passage:

It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. (Wealth of Nations)

Notice that Smith is not asking us to act according to our self-love. He is saying that in our economic exchanges we should appeal to other peoples’ self-love as the basis for meeting our needs. Smith wasn’t the most orthodox theologian but he did seem to have a Calvinistic notion of human depravity. Smith did not believe an economy could function with people simply depending on others to behave benevolently and with good will. It is far better for the butcher, brewer, and baker to see their fortunes tied to our own fortune. We become economically integrated by seeing other peoples’ happiness and satisfaction as directly linked to our self-love/interest.

For Smith, this integration of behavior based on interlocking self-love was not the highest expression of human behavior. In Theory of Moral Sentiments he wrote:

And hence it is, that to feel much for others and little for ourselves, that to restrain our selfish, and to indulge our benevolent affections, constitutes the perfection of human nature; and can alone produce among mankind that harmony of sentiments and passions in which consists their whole grace and propriety.

In short, Smith thought human nature necessitated an economic system of interlocking self-interest but he believed society should produce individuals that aspire to higher virtues of compassion and benevolence. There have been Modernist thinkers who have promoted a Social Darwinist approach to economics, particularly in the late 19th to early 20th century. Yet something more akin to Smith’s view has predominated in Western society.

Another, advantage of Smith’s perspective is that it made the expansion of markets to total strangers more feasible. Sustained benevolence and compassion requires social and geographic proximity and that is possible only with a limited number of people. But an arrangement where the entire populous sees their personal interests tied up in meeting the needs of complete strangers allows for an enormously greater number of market opportunities.

Finally, we have to introduce the issue of capital into our discussion. With the advent of steam power, and later combustion power, it became possible to produce factories that exponentially increased productivity. It made canal and railroad construction technological possibilities. But undertaking these enterprises required the amassing of large sums of capital that were beyond what any one individual or small group of individuals could gather and put at risk. Corporations with share ownership and limited liability emerged to facilitate this process. When people see the net worth of billionaires on display they too often envision a bank account with stacks of money in it. In fact, the great majority of their wealth exists in a variety of debt and equity instruments invested in productive enterprises. That capital is at work creating goods and services, as well as jobs and other benefits, for society. Opposition to owning this much “money” becomes an expression of opposition to private large scale enterprises, whether it is intended to be or not.

Some will no doubt point out the mansion, yachts, and other extravagances some wealthy folks indulge in but those extravagances provide jobs for many people who supply the goods and services to the wealthy. There is no zero-sum game at work here, whereby the wealthy having nice things causes the poverty of others. We may reflect on what impact extravagent living is having on the spiritual wellbeing of the very wealthy and we may question their generosity toward others, but the presence of selfish and greedy people within a capitalist system is a far cry from the accusation the capitalism and free markets are based on greed.

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Economic Fallacies: "'Free Markets' Equals Lawlessness"

The “'Free Markets Equals' Lawlessness” fallacy understands free markets as markets without any restriction on the activities of individuals or corporations.

To examine the idea of free markets let’s take a look at one of our most cherished freedoms: freedom of speech. Most Americans see free speech as a very positive thing. They seek to protect it and encourage it. Yet every American knows there are limits to free speech. You can’t yell fire in a crowded theater or incite a crowd to violence. Libel and slander are prohibited. We disallow false advertising. Perjury is illegal. Does this mean we don’t believe in free speech? No. It just means that we know that every freedom exists in a relationship to other freedoms, rights, and obligations that must be protected as well.

We value free speech so much that we are willing to allow Klan rallies, anti-war demonstrations, and a host of other unpopular events to occur. It is better to have dissent out in the open so the public can make its own evaluations about the truth rather than having a political bureaucracy decide what may and may not be considered. It is one of the checks that our society places on government control.

We tolerate abuse of free speech by those who abuse truth and righteousness because we value what free speech might mean when government is on the wrong side of truth and righteousness. While we recognize it is unfair to incite violence, to slander others, or to perjure ourselves we do not invent some “higher standard” of legally enforceable speech called “fair speech” to rein in every abuse that violates our sensibilities. We use our free speech to counter unfair speech and we work to instill a higher sense of virtue in those who abuse free speech. We see a similar attitude taken toward other freedoms.

In Contrast, many Christians view economic freedom as a necessary evil. It is something dangerous that must be measured out. Christians want justification for why people should have economic freedom instead of placing the burden of proof on those who would restrict freedom. Instead of seeing abuse as a necessary consequence of human freedom to be combated by virtuous people, just as with free speech, every economic injustice is highlighted as a justification for more restriction on freedom as if freedom itself were the problem.

The existence of "free markets" is not the same as absence of law nor is economic freedom independent of relationships to other freedoms. Markets are ideally made up of non-coerced participants trading with each other, each having full information. That ideal is never fully realized but that is the aim. Essential to markets are laws and customs that create just and honest transactions (commutative justice.) Also essential is a just and honest court system for hearing and resolving disputes (remedial justice.)

One way commutative and remedial justice come into play is with what economists call externalities. Externalities are instances where a third party either benefits or suffers economically from a transaction they weren’t party to. For instance, if you are my next door neighbor and you do a beautiful job of landscaping your front yard, my property value goes up. That is a positive externality. However, if you are running a factory upstream from my community and dumping waste into the river to the point that the water is unusable for me, then you are generating a negative externality. Enforcement of my property rights requires that I be compensated for your use of my resources.

Strong juridical frameworks are essential for free markets because we know that markets create externalities and that there are imperfections in markets. Unfortunately, Western nations are only now beginning to appreciate how essential juridical frameworks (combined with the values and institutions that underlie them) are to the function of markets. Western nations have just assumed the presence of Western property rights and ideas of justice as they have introduced free markets to developing nations. Many of these economies have 80-90% of their business happening outside of the formal economic system and posts within the formal economic system are held by a connected elite who view these positions as their vehicle for personal enrichment through bribes and extortion. Imposition of free markets without attention to underlying social institutions and values tends to concentrate great wealth in the hands of the elite with little benefit to the vast majority.

Sometimes corporations from economically advanced nations have received aid from governments (political and military) to thwart change in developing nations and to protect the corporations’ interests. Many lay this out as critique of capitalism or free markets. It isn’t. It is a critique of imperialism. Imperialism is not a component of capitalism. Imperialism is possible whenever one nation has the economic strength to fund political and military interventions in the affairs of other nations. Capitalism is but one way to amass the wealth necessary for such exploitation and domination. It is not peculiar to capitalism.

On a similar note, many argue that colonialism was a key ingredient to the formation of capitalism. Instead, I would suggest that colonialism was a holdover from a pre-industrial era. It was not essential. In fact, it is entirely possible that colonialism hampered the rate of expansion in worldwide wealth, even in developed nations. Protectionism by the USA and Europe on a host of agricultural goods is a contemporary expression of this same anti-market thinking.

Free markets circumscribed within a tight juridical framework are essential for prosperity but we are learning that these arrangements can’t be magically imposed on a society. Appropriate intermediate steps are frequently needed to emerge the underlying culturally appropriate institutions, values, and virtues that under gird economic freedom. Economic transformation through “extreme makeover” approaches rarely work.

“Free markets” is not a synonym for unbridled or unfettered licentiousness. This is a widely propagated distortion by polemicists that want more government involvement in the marketplace. The attempt is to paint a picture of a Social Darwinist “survival of the fittest” dystopia and cast anyone who speaks favorably of free markets as a heartless tyrants from a Dickens novel. It is similar to calling a free speech advocate a racist because she supports the freedom of the KKK to speak publicly. A free market approach is none of this.

A free market approach values freedom. It values virtuous market players making decisions within the context of a strong juridical system. It recognizes the overwhelmingly superior ability of markets to synchronize supply and demand, and it places the burden of proof on those who would restrict markets, not on those who opt for freedom. It is a system that recognizes that the price of freedom is some people behaving poorly. It is anything but lawlessness and licentiousness.

In conclusion, Pope John Paul II from Centesimus Annus:

Can it perhaps be said that after the failure of communism, capitalism is the victorious social system, and that capitalism should be the goal of the countries now making efforts to rebuild their economy and society? Is this model which ought to be proposed to the countries of the Third World which are searching for the path of true economic and civil progress?

The answer is obviously complex. If by “capitalism” is meant and economic system which recognizes the fundamental and positive role of business, the market, private property, and the resulting responsibility for the means of production as well as free creativity in the economic sector, then the answer is certainly in the affirmative, even though it would perhaps be more appropriate to speak of a “business economy,” “market economy,” or simply “free economy.” But if by “capitalism” is meant a system in which freedom in the economic sector is not circumscribed within a strong juridical framework which places it at the service of human freedom in its totality and which sees it as a particular aspect of that freedom, the core of which is ethical and religious, then the reply is certainly negative. (Centesimus Annus, 42)

[Index]

Economic Fallacies: "Linear Projection"

The Linear Projection Fallacy projects present circumstances and trends endlessly into the future without allowing for innovation and societal change.

There are about 300 million people in the USA today. Of that total about 13% (39 million) would say they were Black and another 13% would say they are Hispanic. Let’s say that by this century’s end we expect to have a population of 450 million people, a 50% increase. Therefore, we should expect to find 58.5 million (50% increase) Blacks and 58.5 million Hispanics in the USA in 2100. Right? Wrong.

This projection looks at a static cross-section of the population at a point in time, presumes the distribution percentages of the cross-section to be constant, and then projects that reality indefinitely into the future using a dynamic variable. But we know that fertility rate differs among Whites, Blacks, and Hispanics. Immigration patterns differ as well. Might fertility rates change for one or more groups in coming years? These are just some of the variables in play. Few things in societies or economies stay constant and the Linear Projection fallacy errs in seeing present realities in static terms, rather than dynamic interrelated terms. It then projects these static realities into the future.

Let’s roll back the clock to 1900 in the United States. Urbanization is well underway. The primary means of transportation is the horse (except for long distance trips using trains.) Already city streets are filled with horse manure. The smell is pungent. The animal waste and the animals themselves are breeding grounds for disease. Horses consume a grain that could be used for human consumption. Then we learn that the population is expected to quadruple within 100 years (as it actually did.) That means four times as many horses and all the problems that go with them. Cities will be overrun by these issues and American society will collapse. This is a perfectly legitimate projection of present realities into the future. But is that indeed what happened? No.

Some folks in the late 19th Century had already begun experimenting mechanical devices. They took two bicycle frames and welded a platform between them to create a four wheeled wagon. They placed a motor on the platform to power the wheels and they added a steering mechanism. By 1910 this contraption known as the automobile was in mass production. Shortly thereafter the horse disappeared as a significant feature of American life. People opted for a new mode of transportation that had many significant advantages over horses with few of the negative side effects. Cars went on to create their own side effects but they were still far superior to the horse. Entrepreneurs tuned into the needs of society and through market inspired innovation brought solutions into the marketplace. People exercising their economic freedom choose more suitable options.

This story can be repeated over, and over, and over, with regard to societal and economic changes. So can the tales of those who have bought into the Linear Projection fallacy. Thomas Malthus, an 18th and 19th Century Anglican minister and the father of demography, has to be the patron saint of the Linear Projection fallacy. Malthus studied vital records in the parishes where he served as he reflected on patterns he saw in human societies. At the center of Malthus’ conclusions was the observation that population will always grow geometrically (i.e., 2, 4, 8, 16, 32…) while resources will only grow arithmetically (i.e., 1, 2, 3, 4, 5…). Therefore, at some point the population will always grow beyond the ability of the natural resources to support it. Plague, famine, wars, sexual abstinence, as well as murder, abortion, and contraception, would inevitably check human growth. Malthus understood this to be an unalterable pattern of human existence.

What Malthus could not see was the impact of economic freedom, the specialization of labor, the expansion of trade, and especially the astronomical explosion in productivity brought by industrialization. The 200+ year long Demographic Transition began in the eighteenth century just prior to Malthus’ birth and reshaped the whole picture.

Rising prosperity and improvement in a number of quality of life variables led to declining death rates while birth rates remained at their same high level. People were living longer and more people lived into adulthood having children of their own. Eventually birth rates began to decline as well but they always lagged behind the decline in death rates. This led to a gradual, but substantial, growth in population. Malthus’ population checks were expected to kick in at anytime. But due to science and industrial technology applied to food production, as well as expanding economic freedom, the supply needed to sustain society always multiplied ahead of the population. Malthus arithmetic constraints had been lifted. By the mid-twentieth century the death and birth rates stabilized at about replacement levels. The developing world has been experiencing the Demographic Transition in a much more compressed timeframe over the last half century. The twentieth century experienced a population explosion because the reduction in death rates that took the West two centuries to move through was accomplished in less than two decades in many nations around the world. Cultural changes affecting birth rates are catching up and the world wide population is expected to stabilize before the end of this century at about 9-10 billion.

Every few years a new breed of Malthusians appears on the scene. Many will remember Paul Ehrlich’s Population Bomb from the 1960s that forecasted 100s of millions of people dying of starvation before 2000. Then there was the Club of Rome’ Limits to Growth Report in the 1970s and Jimmy Carter’s 1981 Global 2000 Report declaring that economic growth could not continue indefinitely because of limited resources. They predicted we would be running out of numerous natural resources by the year 2000. We see many of these projections being resurrected again by some in the sustainable growth movement. Many are drawn to Jared Diamond’s Collapse. He attributes the collapse of civilizations to resource and environmental limitations.

Are we exhausting natural resources? No, nor will we anytime in the near future even with global economic growth. How do we know? Prices in commodities markets incorporate present and anticipated demand. They also account for existing supply as well as the cost of extracting the raw materials. If commodities are becoming scarcer relative to demand, then their price will be rising. Here is the conclusion of one study presented to the IMF in 2001:

“Using the longest dataset publicly available (The Economist’s index of industrial commodity prices), we analyze the behavior of real commodity prices over the period 1862-99, and have two main findings. First, while there has been a downward trend in real commodity prices of 1.3 percent per year over the last 140 years, little support is found for a break in the long-run trend decline in commodity prices. …” (The Long-Run Behavior of Commodity Prices: Small Trends and Big Variability by Paul Cashin and John C. McDermott, International Monetary Fund.)

Jared Diamond devotees fail to notice is that we live in a sustainable economic system right now. Past societies had no effective feedback loop about resource depletion like we do with markets. There is no impending exhaustion of natural resources. As resources become relatively scarcer, the price will rise. People will begin to find ways to use less of the commodity, to recycle, or to find more plentiful substitutes (renewable resources being the most desirable.) Markets are a virtual eco-system that directs us toward sustainable growth. Present global economic growth is easily sustainable for populations well beyond our present worldwide levels. When resources become an issue, we have markets to signal a problem. Because of constant innovation and ever improving productivity we simply can’t project today’s usage into the future.

While there may be legitimate reasons to place limits on some technologies because of their pollution or manage the extraction of natural resources to protect habitats, this is a different question than limiting economic growth because we are exhausting the world’s resources. It is a case of projecting current behaviors and growth rates indefinitely into the future without regard for the market signals, innovation, and changing societal values. Few people would deny that renewable resources are the optimal choice but shutting down economic growth, and thereby leaving 100s of millions of people trapped in poverty because one day we might begin to run out of some resources centuries from now is over reaction.

This is not the only economic issue that suffers from the Linear Projection fallacy but it is one of the most prominent expressions of it. Thinking economically requires us to think in terms of an organic dynamic interrelated system.

[Index]

Economic Fallacies: "Zero-Sum Game"

The Zero-Sum Game Fallacy views wealth as a fixed quantity meaning the only way someone gets wealthy is at someone else’s expense.

There are three possible types of games in the world. First, there is the lose-lose game. There are not many examples of this one. I always think of the 1983 movie War Games starring Matthew Broderick. The military’s supercomputer takes on a mind of its own and plays out all the scenarios of a nuclear war only to conclude that the only winning move is not to play.

Then there are win-lose games. Most athletic competition is of this type. Turn to the sports section of newspaper and look at the standings for the teams in the National Football League. Add up every team’s wins and every team’s loses, subtract the loses from the wins, and the total will be zero. If any team has more wins than loses, then someone else must have more loses than wins. This is the perspective that many have about wealth and poverty. Someone’s wealth is the cause of someone else’s poverty. But the market economy is not a win-lose game.

The market economy is a win-win game. If you add up the growth in Gross Domestic Product (GDP) for all nations in a given year, the total will not be zero. Overall wealth is growing. Some nations are getting a greater portion of the expansion than others and a few nations may actually have declined in GDP but the total for the world is a positive number. How does this happen?

Jay Richards in his talk on Economic Myths uses the example of “The Trading Game” played in many classrooms. Richards describes his experience playing the game in the sixth grade. Each student was randomly distributed an item of approximately the same value. Each student was instructed to rate how much they valued what they had received from 1 to 10 with 10 being the highest value. Richards received Barbie trading cards, which he ranked as a 1. Then the students were placed in groups of five and allowed to trade with each other. Richards found a girl with a paddle-ball and they traded to each other’s satisfaction. The students recorded their values again. Finally, they were allowed to trade with anyone else in the room. When the trading was finished, the students wrote down the value of the item now in their possession.

If you added up the students' ratings at the start of the game and compared them to the sum of the students' ratings at the end of the first trade, you would find that the sum for the class was higher than it was at the beginning. The sum would be higher still after the second round of trade. Furthermore, no one would have an item of lesser value than the one they started with at the end of the game. There were rules to these market exchanges. There was no theft or intimidation so there was no way to go lower than the value of the starting item. Often in these games, everyone’s value goes at least a little higher. “Societal wealth” has expanded purely through free trade in an environment with rule of law and respect for property rights. This is without even considering the enormous impact of human and financial capital on production and distribution of goods and services.

The Zero-Sum Game is possibly the most pervasive of the economic fallacies. Well-meaning Christians see people in poverty and decide that the answer is to shift more wealth from the rich to the poor. They look at what Americans have and conclude that the USA has more than their “share” (of a fixed amount) of wealth. Now let’s be clear here. Just as with biblical ethics in the Mosaic Law, society is obligated to care for the poor and helpless. This is different from saying that redistribution should be imposed because one group has more than another or that one group’s wealth is the cause of the other’s poverty. The issue is not that the wealthy have taken from the poor but that the poor have nothing to trade in the economy. Robert Lupton in short but excellent book Compassion, Justice, and Christian Life: Rethinking Ministry to the Poor, writes:

Remember your last garage sale? Or the last antique bargain you purchased at a flea market? Or the last car you traded? How is it that when a transaction is done well both purchaser and seller come away with a sense of gain? It’s the magic of exchange. And it transcends the boundaries of age and gender, race and class. Whether the find is a rare Babe Ruth baseball card, a silk blouse reduced for quick sale or the perfect piece of land at the right price, the ecstasy of exchange is for all to enjoy.

Exchange is remarkably invigorating process. The very thought of acquiring a new treasure motivates us to calculate value, rearrange priorities, juggle finances, analyze past performance and make predictions about the future. And ultimately, it pushes us to the risky edge of letting go of something valued in the hopes of gaining that which will be of greater worth to us.

However, when the labor you offer is unneeded in the marketplace of when your abilities area worth less to employers than the amount of your welfare check, you are exchange-less. Indeed, poverty may be defined as having little of value to exchange. And when society subsidizes you for being a noncontributor, it has added insult to your already injured self-esteem. (43-44)

Well intentioned efforts to redistribute wealth to the poor can have too negative consequences. First, the wealthy have not taken their wealth and put it in a safe at home. The great majority of their wealth is invested in productive enterprise like owning their own business, owning shares in other businesses, or in loan instrument at lending institutions. Reducing the wealth of the wealthy  through forced redistribution means fewer funds for productive economic enterprises and if the reductions are substantial enough it slows economic performance. Second, subsidizing “noncontribution” by the poor is dehumanizing. God has called each of us to be stewards over some corner of his creation. It is an ontological expression of our humanity. Our primary focus must be restored stewardship; equipping people with something they can trade in the marketplace combined with the skills to work the marketplace.

Developing nations need greater gradual integration into the global market economy (not the failed “extreme makeover” approach imposed by developed nations in the past) with more economic freedom circumscribed by the rule of law and property rights so they may partake of the benefits of the trading game. Our objective is not equalizing a falsely conceived fixed amount of wealth in the world.

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Economic Fallacies: "New Creation Now"

The “New Creation Now” fallacy holds the we can create “heaven on earth” while disregarding the reality that the New Creation can not be fully realized until Christ's return.

It is very common for economic critics to look at any number of issues that concern them (ex. income distribution, pollution, corporate abuse), compare them to the biblical narrative and teaching, and then declare the system in which these injustices have occurred unjust. On the surface it sounds quite convincing. Yet, simple reflection on eschatology will tell us that every system this side of Christ consummating the New Creation will have injustice within it. Therefore, while we have the New Creation as our ultimate standard, our mission is to discern what societal arrangement creates the greatest justice relative to other options this side of Christ’s culminating work in history.

Related to this problem is the tendency blame the system for decisions of people within the system. The unstated presumption seems to be that there should be a system out there that results in no injustice. Yet the entire narrative of scripture is one of God lovingly tolerating humanity’s rebellion that they may have the opportunity to respond to him in love. We are given freedom so that we may have the opportunity to choose God. Some do not. Is God an unjust God because he did not place in a system that always results in justice? The only system that achieves such results is one where human beings are automatons or where they have been transformed in the New Creation into beings who flawlessly choose God. Human freedom this side of the New Creation means injustice is a fact of life. To fault an economic system because it does not result in perfect justice is pointless. Again, we must ask which system is most just relative other pre-New Creation possibilities. Mercy, compassion, and benevolence must then supplement justice.

We live in the tension of the Kingdom of God “already, but not yet.” The Kingdom of God is among us. We are new creatures in Christ. But the Kingdom of God is not as it will be, nor are we all that we will be, when Christ makes all things new.

We know that the whole creation has been groaning in labor pains until now; and not only the creation, but we ourselves, who have the first fruits of the Spirit, groan inwardly while we wait for adoption, the redemption of our bodies. For in hope we were saved. Now hope that is seen is not hope. For who hopes for what is seen? But if we hope for what we do not see, we wait for it with patience. (Romans 8:22-25, NRSV)

God has placed us in a tension that we usually try to escape by gravitating toward one end or the other of a polarity. One pole has us becoming so acclimated to the present order of things that we loose any eschatological vision. With the unprecedented destruction and upheaval of the 20th Century, many Christians have adopted a pessimistic eschatological vision of the world that diminishes interest in seeking the redemption of the world order in favor of simply “saving souls” from the sinking societal Titanic. Proleptic living is reduced to evangelistic messages.

The other pole has us believing that we can usher in the New Creation (or nearly so) through pietism and reformation zeal. The pietistic response usually expresses itself in terms of separatism in order to draw the world to a new way of living. The reformation response tends to lean toward idealistic reworking of societal systems to bring them into accord with some grand new vision for ordering life. The reformers are often willing to using the coercive power of the state to compel compliance to their vision of righteous living.

Either pole of this tension can lead to horrible consequences. The acclimation approach can lead to resistance (even violent resistance) to change when God calls us into new realities. But idealism unchecked by a rigorous evaluation in light of historical insights and realistic pre-New Creation alternatives spirals off into dangerous utopianism. Idealists are right to challenge the tendency toward complacency but it is my experience that far too many idealists use resistance to the alleged complacency of their opponents as a diversion from their own lack of rigorous engagement with economic complexities. Frequently an overly pious attitude about their prophetic witness often leads them into the kind of error I described with the Piety fallacy. It sometimes makes things worse than if nothing had been done at all. Liberation theology has sometimes led to this extreme and there is a dangerous seduction toward totalitarian visions.

It is my understanding of scripture that over the ages until Christ returns we should expect to see and expansion of the Kingdom of God in the world. It will come in ebbs and flows but the expansion will have a redeeming impact on the social systems of the world. It will not be the world of the consummated New Creation. The wheat and tares grow up together. The yeast leavens the dough. Creation groans as a woman in labor awaiting the new birth.

I’ve had this discussion enough times to anticipate the dual negative response to what I’ve written. Some will be critical that I have distracted us from “saving souls” and say I’m overly optimistic about the possibility for greater expressions of shalom in this “already, not yet” time. Others will say that I’m watering down the radical message of Jesus and preventing the full expression of the Kingdom of God. I say I’m fully embracing the tension of living in the “already, not yet,” and that forces me to walk humbly with God seeking discernment, steering the way between accommodation and utopianism.

Economic analysis devoid of the transforming narrative and teaching of scripture will lead to co-option by the spirit of the age. Economic analysis devoid of anthropology and of an appreciation for the collective wisdom of past human experience will lead to dangerous utopian schemes. Discernment and prudence are important virtues in assessing economic questions.

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Economic Fallacies: "The Piety Fallacy"

The Piety fallacy is uncritical action based on pietistic interpretations of scripture without regard to actual outcomes resulting from those actions.

This fallacy has a variety of expressions. In the previous post I pointed to the jubilee code in Leviticus 25 and its use in the debate over debt cancellation and wealth distribution in developing nations. A close reading of the text makes clear that the jubilee has nothing to do with debt cancellation or wealth redistribution. Some use the early chapters of Acts to make the case that the Bible teaches society-wide communal ownership, which a careful reading doesn’t support. Yet to champion justice for the poor and the oppressed, or to be counter-cultural against perceived mainstream values of materialism, is seen as the pious thing to do. The piety fallacy is usually grounded in fervent good intentions but the commitment to pious responses comes to take precedence over critical evaluation of outcomes.   

I’ve borrowed the name for this fallacy from a lecture by Jay Richards in which he used precisely the example I thought of when he described the fallacy. Nearly twenty years ago in an urban economics class, I remember reading about the impact of rent controls on housing. There was a strong correlation between imposing rent controls and the increase in homelessness. Rent controls decreased the amount of affordable housing stock.

If a landlord can not increase rent and costs of operations for him continue to rise, then all profitability is eaten up. New apartments aren’t built because developers know they can’t collect enough to make it worth their while. Apartment owners begin converting apartments into condos or non-residential uses. When rent controls have been tried in some major cities, landlords have actually turned to arson in order to collect insurance money for property they can no longer make money on or sell to anyone else. Meanwhile, the available rental housing is decreasing making what remains more expensive. Tenants with leases don’t relinquish them even after the leave, subleasing apartments to others for what the market will bear. They get the difference between the rent control price and the market price that the landlord should have gotten. This makes the rental market even tighter. Yet in nearly all rent control initiatives, pious Christians will be out supporting rent control as justice for the homeless even as they deride there opposition as impious heartless people who are callous toward the poor.

Richards offers another provocative example. He notes child labor laws came into effect in the early twentieth century, just as child labor had gone into significant decline within the workforce. Not long before this time child labor was essential to family survival as indeed it has been in agriculture throughout history. By the early twentieth century public education was widespread and child labor was preventing children from engaging in activities that would have greater long term consequences for them.

Today, as we look at many developing nations, justice folks champion an end to all child labor. In many developing nations, half the population or more is under 18 years old. What is often not taken into account is that the alternative to children working is not children going to school for an education. The alternative is prostitution, starvation, or worse. Until basic survival needs are met, removal of children from the work force is not practical. This violates our sensibilities and there is no question it is far from what we desire for others. Yet uncritically imposing our pious sense of moral judgment on these cultures can do great harm, despite our best intentions. I’m by no means saying that the ethics with these issues are easy to sort out but doctrinaire pietism is not the answer.

When judgment day comes we will no doubt be held accountable for our intentions but I’m also convinced that we will be held accountable for use of our discernment. Many economic justice questions require us to balance competing ethical claims against each other as well as using discernment about what will actually work or not work. Uncritical pietistic actions can be an expression of naiveté but too often they are also personal identity statements a person uses to demonstrate their piety in contrast to those they believe less pious. Biblical justice demands that we have not only pious intentions but truly just outcomes.

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Economic Fallacies: "Biblical Redistribution"

The Biblical Redistribution fallacy identifies wealth equalization as the primary economic concern of the Bible, the Jubilee Code of Leviticus 25 being the most exemplary passage.

Public policies ranging from tax rates to debt cancellation for developing nations are advocated based on this perspective. These policies may be worthy and appropriate but that is distinct from whether the Bible teaches legislated redistribution of wealth. Let’s start with the Jubilee Code.

The Israelites were instructed to take a Sabbath year every seven years. The land would lie fallow and labor would cease. Every fifty years there would be a jubilee. (Depending on how you read the text it may actually have been every forty-nine years.) Each family returned to their ancestral land, bonded labor come to an end, debts expired, and the people celebrated and worshiped God.

Historically, there is no evidence that the jubilee was ever observed. However, we need to see how the jubilee would have worked had it been observed. Here are the provisions of the jubilee for land transactions:

Lev 25:13-17

13 In this year of jubilee you shall return, every one of you, to your property. 14 When you make a sale to your neighbor or buy from your neighbor, you shall not cheat one another. 15 When you buy from your neighbor, you shall pay only for the number of years since the jubilee; the seller shall charge you only for the remaining crop years. 16 If the years are more, you shall increase the price, and if the years are fewer, you shall diminish the price; for it is a certain number of harvests that are being sold to you. 17 You shall not cheat one another, but you shall fear your God; for I am the LORD your God.

The one who holds title to the land holds it permanently. If jubilee is followed, then what we have is a lease agreement based on “a certain number of harvests that are being sold to you” between the time of the transaction and the jubilee. Come jubilee, the lease expires. Keep in mind that this was only agricultural land. The jubilee did not apply to property in the cities. There is no redistribution. There is prevention of exploitation.

Lev 25:39-40

39 If any who are dependent on you become so impoverished that they sell themselves to you, you shall not make them serve as slaves. 40 They shall remain with you as hired or bound laborers. They shall serve with you until the year of the jubilee.

If jubilee is followed there are no slaves to set free because “you shall not make them serve as slaves.”

Lev 25:47-52

47 If resident aliens among you prosper, and if any of your kin fall into difficulty with one of them and sell themselves to an alien, or to a branch of the alien’s family, 48 after they have sold themselves they shall have the right of redemption; one of their brothers may redeem them, 49 or their uncle or their uncle’s son may redeem them, or anyone of their family who is of their own flesh may redeem them; or if they prosper they may redeem themselves. 50 They shall compute with the purchaser the total from the year when they sold themselves to the alien until the jubilee year; the price of the sale shall be applied to the number of years: the time they were with the owner shall be rated as the time of a hired laborer. 51 If many years remain, they shall pay for their redemption in proportion to the purchase price; 52 and if few years remain until the jubilee year, they shall compute thus: according to the years involved they shall make payment for their redemption.

Again, there is no slavery and people are bound until redeemed or based on the number of harvests between their sale and the next jubilee. It is leased labor.

The jubilee prevents people from being permanently alienated from their land or labor, (the means of economic production in ancient societies). It ensures that everyone has an ownership-stewardship stake in God’s unfolding plans. It does not curtail or redistribute the amassed herds, urban real estate, gold, or other measures of wealth. There is no redistribution.

There are three elements to economic justice:

1. Distributive Justice – Addresses how capital and goods are distributed throughout the society.

2. Commutative Justice – Addresses the truthfulness of parties to an economic exchange.

3. Remedial Justice – Addresses just compensation and punitive action when there has been malicious or careless damage done to life, liberty or property.

If you go to the prophets and read what they are crying out against it is overwhelming commutative and remedial justice, combined with disregard for the poor. Yes, there are the condemnations of joining house to house and field to field until the poor are driven off the land but this applies to violating the jubilee code portion of the covenant. The poor are denied remedial justice in the appropriation of their land. There is callousness toward the plight of the poor. It is not addressing wealth distribution per se.

Look at the specific indictments that lead up to Amos’ famous “let justice role down” prophecy in Amos 5:18-24.

Amos 5:10-12, 15

10 They hate the one who reproves in the gate, and they abhor the one who speaks the truth. 11 Therefore because you trample on the poor and take from them levies of grain, you have built houses of hewn stone, but you shall not live in them; you have planted pleasant vineyards, but you shall not drink their wine. 12 For I know how many are your transgressions, and how great are your sins– you who afflict the righteous, who take a bribe, and push aside the needy in the gate. …

15 Hate evil and love good, and establish justice in the gate; …

The “city gate” was the place where disputes where heard and settled. The poor were being denied remedial justice. In verse 12 we see bribes mentioned, which is commutative justice. In other passages we read about dishonest scales and measures (Micah 6:11) I’m not aware of any passage that calls upon Israel to redistribute the wealth so all will be of approximately of the same economic status. The prophets are damning the callousness to the plight of the poor and the perversion of commutative and remedial justice.

Moving to the New Testament, often much is made of these passages concerning the Church immediately following Pentecost:

Acts 2:44-45

44 All who believed were together and had all things in common; 45 they would sell their possessions and goods and distribute the proceeds to all, as any had need.

Acts 4:34

There was not a needy person among them, for as many as owned lands or houses sold them and brought the proceeds of what was sold.

It simply isn’t clear what this entailed. Acts chapter 5 speaks of Ananias and Sapphira who apparently were a part of the community and still owned land. They appear to have sold a portion (not all?) of their land and brought the money for distribution to the needy. Their sin was apparently dishonesty about what how much they were giving not that they retained a portion of the money. “Holding things in common” appears to have meant that each retained control of their own property but as needs arose folks made their property available to address the needs of others.

This appears to have been a response to the large number of conversions. No doubt many were ostracized from their families and lost their livelihoods. The early chapters of Acts give a descriptive, not a prescriptive, presentation of how these problems were handled. What is instructive is that economic response was seen as a natural outflow of becoming a Christian and the needs of the poor were addressed. We find no teaching in the New Testament that prescribes radical society-wide redistribution.

What we do see is repeated concern for the poor and we see provision made for the poor in the Mosaic Law. (Like allowing the poor to glean from the edge of the fields.) God declared that he owns all that is and yet ownership of personal property is deeply enshrined in the Law. God said “there shall be no poor among you.” God seems to desire personal stewardship of economic resources. But he also demands a communal outcome that ensures that people who, for whatever reason, have lost their stewardship status (i.e. become poor) are restored as stewards.

The unfortunate leap many make in their concern for the poor is rooted in the Zero-Sum Game fallacy (to be discussed later). Wealth is understood as a fixed amount and one person’s gain is another person’s loss. Addressing poverty becomes a mission to reduce other people’s wealth in assistance to the poor. (It is akin to the reasoning that suggests that the way we make sick people better is by making healthy people less healthy.) Thus, when many read passages about justice for the poor they instinctively read massive societal redistribution into the text. We can argue the ethical merits of massive societal redistribution but it is not a central message of the Bible.

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Economic Fallacies: "Work is Instrumental"

The "Work is Instrumental" fallacy views human economic labor as purely instrumental in service to higher pursuits of spirituality and intellect.

Humanity was created in the image of God. The image of God has primarily been understood through substantive categories throughout much of Western Church history. The substantive view is expressed in two ways: ontological and comparative. Ontologically, we are a spirit, and therefore of the same substance as God. Comparatively, we are like God and unlike nature in some ways, but unlike God and like nature in other ways. The manner in which we are like God and unlike nature points to our image bearing qualities. We are substantively the same as God. This usually is expressed in terms of matters of the mind, like reason and volition.

While this substantive understanding is true, as far as it goes, it does not go far enough. The substantive view alone has led to damaging dualisms of spirit vs. body and mind vs. body. Personhood is equated with one’s spirit or mind. The body and material issues, including work and economic action, are merely instrumental to the spirit/mind half of the dualism.

Narrative scholars have come at the image of God from a functional view (and this view has existed as a minor theme throughout Church history). The functional view observes that, according to Genesis, we were created as material beings for a material world. We were placed in the world to be co-regents and stewards over the world. We are here to “work the garden” and bring creation to completion. Furthermore, there is eschatological importance to our work. We will be raised at the last day with new bodies to work a new creation with Christ. Christ is the firstborn of all creation and is bringing all creation to its fullness. We are participants with Christ in this work as his body in the world. As restored eikons we will once again be co-regents and stewards of creation. Work and economic activity world is not incidental or instrumental. It is central to our anthropology and teleology.

But we must go further. The danger with the substantive and functional views alone is that they don’t sufficiently locate us within the cosmos. They can lead to a low view of nature. The relational view, based in the Trinity, maintains that we exist only in relationship to others. “Others” includes God, fellow human beings, and the material world. We have a dual relationship to the material world. The material world is both the object of our work and the habitat in which we live. It was created good but it is not complete. It is owned by God yet we are stewards of it. (The very word “economics” comes from the Greek word oikonomos meaning “household manager,” the one who looks after an estate in the absence of the head of the household.) The Trinitarian God is complete without the existence of “the other.” However, human beings can only be truly defined in their relatedness to God, to other people, and to the material world. But it is also true that the material world only has its full meaning in its relatedness to God and humanity.

When we work, we exhibit God’s image in the world. Our work has eschatological meaning. The biblical narrative begins in a garden and ends in a garden city. Cities were the ultimate symbol of human commerce, government, and culture. In some sense, the cultural systems humanity is building today (including economic systems) will be redeemed and incorporated into the New Creation. At a more personal level, our work is part of our personal formation and spiritual sacrifice we offer to God. While some things are inherent in us at birth, others are more malleable. Our work, and the spirit in which our work is offered, forms us. That formation of who we are will be redeemed and carried over into the New Creation at the last day. Our work is also evangelistic in that it gives a shadowy witness to what work will look like when the New Creation is consummated.

The negative consequences of the “Work is Instrumental” fallacy are many. With no biblical mooring for understanding work, many in the Church unreflectively absorb the ethos of the culture as they endeavor to live spiritually holy lives. Work is an extra curricular activity to “spiritual” living but it is justified because it generates an income to be tithed in support of those who are engaged in “full-time” Christian ministry. Genuine desire for spiritual growth becomes entangled with the propensity to ground our identities in materialistic and consumeristic ideologies. Some try to take God into the workplace but this frequently translates only into personal piety and using the office as a staging ground for evangelism. Work itself has no intrinsic or eschatological value.

Other Christians recoil at the materialism they see in the Church. They adopt a more ascetic view of faith. People are to engage in economic pursuits only to achieve some level of minimal sustenance that allows them to pursue “higher” spiritual and intellectual calls. Those who engage in economic activity beyond this level are suspected of being materialists who have succumbed to the baser values of our day. Here again, economic action is of value only insofar as it generates an environment where we can move on to more “spiritual” living. Economic activity has little intrinsic value.

Finally, those who champion social justice routinely direct their greatest energy at leveling differences in wealth instead of on equipping the poor to become productive stewards. As we will see later, the Bible has much to say about care and provision for the poor but little to say about redistribution. The desire to radically redistribute wealth often belies a mindset characteristic of the communitarian wing of the Modernist era where human beings are seen purely as consumers. (It also belies a belief in the Zero-Sum Game fallacy, which we will visit later.) There is clearly a need for wealth transfers to the incapacitated and the hungry of the world but if societal redistribution is the primary agenda, then human beings are reduced to the level of just so many cattle that must be fed. Equipping people to work and fostering nurturing environments where the intrinsic human quality of work can flourish are made secondary.

Economic work is intrinsic to human beings bearing the image of God. Work has eschatological value. The “Work is Instrumental” fallacy leads to dualistic unproductive responses to economic questions and it is probably the most widespread economic fallacy believed by Christians of all different theological and political positions.

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Economic Fallacies Christians Believe

I’ve been wrestling with economic issues as it relates to faith all my adult life. Particularly over the last twenty years. I’ve been in deep with Mainline lefties, Neo-cons, Evangelical lefties, Religious Right types, libertarians, and even some honest to God Marxists. (Okay, that last one is a bit of an oxymoron but you get the picture.) Over the years I think I’ve seen a pattern in what leads people into unhelpful thinking about economic issues.

Several months ago I heard Dr. Jay Richards give his presentation Myths Christians Believe about Wealth and Poverty. (If you have iTunes you can find a 67 minute long podcast of one of his presentations by clicking here and getting the free podcast by the above name.) He has a book coming out in 2009 that will include a discussion of myths and more. What I found interesting as I heard his presentation is that, on a couple of occasions, he used precisely the examples I’ve used to challenge the same notions; specifically the use of rent controls as an example of misplaced good intentions and projecting horse transportation problems indefinitely into the future at the beginning of the 20th Century as an example failing to anticipate change. I’ve taken his myths and let them simmer in my mind a little. I think he is on to something.

What I want to do now is take a shot at my own list of economic fallacies Christians believe. I will use Richards' presentation as a launching pad. I’ve tentatively identified about seven or eight that I will describe over the next two weeks or so. Some of these overlap and intersect so we will see how this works.

I’ll be in Louisville at the end of this week and I don’t expect to blog much the Thursday and Friday of Thanksgiving week so the entries may be sporadic. We will see what time allows.

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