Christianity and Capitalism, Part I
What type of economic system should a Christian support? The Bible does not systematically and explicitly proscribe one, much less explain why that system will work. Nonetheless, there are certain principles relating to economics that are laid out in scripture, and while a variety of different policies may be allowable, there are several features of an economic system that are either required or allowed.
Ownership of Property
God’s creation includes physical, material things. His plan for mankind includes labor, which produces both physical goods and intangible services. It is clear from scripture that He intends that individuals have the right to own these things as their own personal property. This is supported by two of the ten commandments, namely, “You shall not steal” and “You shall not covet” These two commandments affirm that something belongs to one person and not someone else.
Ultimately, however, God is the owner of all things;
“For every beast of the forest is mine, the cattle on a thousand hills. I know every bird of the mountains, and everything that moves in the field is Mine. If I were hungry, I would not tell you; for the world is Mine, and all it contains.” Ps. 50:10
What we have has only been entrusted to us, and we are simply stewards. Part of that stewardship requires…..
Taking care of the Poor
Compassion and concern for the poor are among the Bible’s most well-known traits. When God called the Israelites to live in a community under His covenant, he established several laws whose purpose was to provide for the needs of the poor.
1. Some of each person’s agricultural harvest was to be left for the poor.
“Now when you reap the harvest of your land, you shall not reap to the very corners of your field, neither shall you gather the gleanings of your harvest. Nor shall you glean your vineyard, nor shall you gather the fallen fruit of your vineyard; you shall leave them for the needy and the stranger. I am the Lord your God.” Lev. 19:9-10
2. The tithe in the third year of every seven-year cycle was to go to the poor.
“At the end of every third year you shall bring out all the tithe of your produce in that year, and shall deposit it in your town…the alien, the orphan and the widow who are in your town, shall come and eat and be satisfied, in order that the Lord your God may bless you in all the work of your hand which you do.” Deut. 14:28-29
3. The poor had the right to interest-free loans and food priced at cost value.
“Now in case a countryman of yours becomes poor and his means with regard to you falter, then you are to sustain him, like a stranger or a sojourner, that he may live with you. Do not take usurious interest from him, but revere your God, that your countryman may live with you. You shall not give him your silver at interest, nor your food for gain.” Lev. 25:35-37
Likewise, the New Testament church also adopted the same principles, if not the same exact practices:
“What good is it, my brothers, if a man claims to have faith but has no deeds? Can such faith save him? Suppose a brother or sister is without clothes and daily food. If one of you says to him, ‘Go, I wish you well; keep warm and well fed,’ but does nothing about his physical needs, what good is it?” James 2:14-16
Likewise, in the Olivet Discourse, Jesus says that those who did not feed, clothe, and water the least of His brethren will not go into eternal life (Matt. 25:31-46).
Given the Bible’s teaching on concern for the poor, some have argued that the Bible requires that all people are to be more or less economically equal. Two additional passages are used to support this assertion.
1. Leviticus 25 - The Jubilee. When the Israelites settled in the Promised Land, each family (except those belonging to the Levites) received a plot of agricultural land. Occasionally, an Israelite would fall on hard times, and he would need to sell his land. Every fiftieth year, the land would be returned to the original owner’s family (Lev. 25:13). And since land was the most important economic form of wealth in ancient agrarian societies, some have interpreted this as a call for distributing wealth in an equal fashion.
There are several problems with this approach, however. For starters, the price paid for the land was based on the number of years remaining until the Jubilee (Lev. 25:14-16). So, if someone wanted to buy the land two years before the Jubilee, he would simply pay for two years worth of harvest instead of paying for the market value of the land based on the assumption that he would own it permanently. In fact, God labeled the charging of more years than were remaining as “wronging” the buyer (v.14, 17). This doesn’t seem to prohibit fluctuations in the going rate for a year of harvests (I.e., a higher price when there were few land plots available for lease, lower when there were many). But charging for more than more years than there were remaining was prohibited, and so the buyer didn’t actually suffer a loss when his lease expired in the Jubilee year.
Furthermore, only agricultural land was affected. It did not include other forms of wealth. Livestock, fishing boats, houses within cities, and profits from the years renting the land weren’t subject to any kind of redistribution. An agricultural baron who had rented a plot of land in one Jubilee period would likely have the means to rent out other plots of land which would certainly have come up for sale in the next period. His operation would simply move from one plot to another. It did not put him on an equal footing with the rest of his countrymen.
What was the purpose of the Jubilee? The Bible doesn’t say exactly. Some have argued that since God requires an able-bodied person to earn his/her own living, He must want each person to have the resources to be able to do so. And since land was the most important income-producing resource in ancient Agrarian societies, God wanted each family to never lose it.
This explanation is probably the correct one, but it should be noted that there were other crafts that an individual could earn a living from, such as tailoring, fishing, construction, and metalworking. In fact, there was even a provision in the law that if a land seller prospered sufficiently before the end of the Jubilee period, he was entitled to redeem his land from the buyer by buying back the number of remaining harvests (v. 28). Also, an alien living in the land (who did not receive an original land inheritance) could prosper, and even might be able to afford slaves (v. 47).
Even if that is not the whole story, the assertion that God wants each person to have whatever resources are necessary to provide for themselves and their families makes sense, since He has commanded that each person do just that;
“If anyone does not provide for his relatives, and especially his immediate family, he has denied the faith and is worse than an infidel.” 1 Tim. 5:8
Thus, giving each person the resources necessary to earn a living should be a component of an economic system that is in compliance with Scripture. In an industrialized, technologically advanced society, education/job skills are the most important assets that enable a person to earn a living. There are other assets for producing income (stocks, bonds, real estate), but these can be acquired once one is gainfully employed.
Acts 4:32-35 is also used as support for economic equality:
“All the believers were one in heart and mind. No one claimed that any of his possessions was his own, but they shared everything they had. With great power the apostles continued to testify to the resurrection of the Lord Jesus, and much grace was upon them all. There was no needy among them. For from time to time, those who owned lands or houses sold them, and put it at the apostles’ feet, and it was distributed to anyone as he had need.”
The first thing that should be noted is that this process was voluntary, as the next pericope (Acts 5:1-10) very clearly shows. There, Ananias sells a piece of land and keeps some of the money for himself and his wife. He lays the rest down at the apostles’ feet, and Peter rebukes him, and he dies. But keeping some of the money was not his sin. Peter says to him,
“Didn’t it belong to you before it was sold? And after it was sold, wasn’t the money at your disposal? What made you think of doing such a thing? You have not lied to men but to God.” Acts 5:4
His sin was in lying to the apostles and telling them that it was the full amount. He was under no obligation to sell the land, or to give all of the money to the apostles. It is also clear from the epistles that some members of the church had and retained estates that were large enough that they had slaves to manage them.
Does the Acts passage apply to us today? Yes and no. Yes, in the sense that Christians are to share their possessions with their Christian brothers who are in need.
However, in another way this passage in Acts doesn’t apply to Christians today. The circumstances were unique. Thousands of people had come to the Lord, and many of them were from other parts of the Roman empire. They were visiting Jerusalem when the gospel was preached to them. As visitors, it would have been difficult, if not impossible, for them to earn a living locally. Ideally, however, the New Testament teaches that those who can provide for themselves are obligated to do so.
“For even when we were with you, we gave you this rule. ‘If a man will not work, he shall not eat.‘ We hear that some among you are idle. They are not busybodies. Such people we command and urge in the Lord Jesus Christ to settle down and earn the bread they eat….If anyone does not obey our instruction in this letter, take special note of him. Do not associate with him, in order that he may feel ashamed.” (2 Thess. 3:10-12, 14)
Two other things should be noted about the aid given to the poor in the church.
1. The family of the poor person, not the community, bore the primary responsibility for their aid. Writing to Timothy, Paul wrote,
“If any woman who is a believer has widows in her family, she should help them and not let the church be burdened with them, so that the church can help those widows who are really in need.” 1 Tim. 5:16
2. The aim of the care for the poor is to provide for their basic material needs, not to create economic equality. In fact, the Bible teaches that while a person’s material prosperity may vary over time, we are not entitled to have more than our basic needs met at any given point in time:
“For we brought nothing into the world, and we can take nothing out of it. But if we have food and clothing, we will be content with that.” 1 Tim. 6:7-8
Do civil governments have a role in the care for the poor? A handful of Christians take the view that the duties of a government are strictly limited to what is commanded of them in scripture. In their view, the Bible doesn’t proscribe government aid, and so a government is in violation of Biblical principles if it is involved in distributing aid to the poor.
In ancient theocratic Israel, tabernacle and state were one, so any aid coming through the priests (like the third-year tithe) would also be government aid. How about a pluralistic society where Christians are a minority? That was the case in the early church, and there is no indication that the church made an attempt to care for all of the poor in the Roman Empire. Such an undertaking would have been impossible, given their resources both in terms of manpower and finances, and this is going to be true wherever faithful, orthodox Christians are not in the majority (which is to say, almost always). In fact, the city of Rome had a government-run social safety net, which made grain available to the poor at a reduced prices. When Paul wrote to the Romans, he referred to the governing authorities and the need to be law abiding citizens. If government aid to the poor was really an issue one would think that Paul would have denounced such a system. There is no biblical basis for concluding that aid to the poor cannot come from the state. This is not to say that such government-run programs don’t have their share of problems, and in fact the church can help the poor in ways that the state often cannot. Sometimes poverty is the result of circumstances beyond a person’s control, and sometimes it is the result of self-destructive lifestyle choices. The church is (or should be) more effective in helping the latter. Furthermore, the fact that a family was primarily responsible for taking care of a poor person, and the church second, establishes a pattern that the larger community becomes responsible for the poor when the closer levels of community cannot provide for their needs. It makes sense, then, that government aid to the poor should be the last resort, after family, friends, and church resources have been exhausted.
The Wealthy Oppressors
The Bible, particularly in the OT Prophetic books, speaks of rich people who oppress the poor, and rulers who failed to come to their defense and give them justice. In recent times these verses have been applied to the mere fact that some people are wealthier or much wealthier than others, and that this, by itself, constitutes “oppression” and “social injustice”.
Let’s look at some of these passages:
“Woe to those who are heroes in drinking wine, and valiant men in mixing strong drink; who justify the wicked for a bribe and take away the rights of the ones who are in the right.” Is. 5:22-23
“Do you become a king because you are competing in cedar? Did not your father eat and drink and do justice and righteousness? Then it was well with him. He pled the cause of the needy: Then it was well. Is not that what it means to know Me? Declares the Lord. But your eyes and your heart are intent only upon dishonest gain, and on shedding innocent blood, and on practicing oppression and extortion.” Jer. 22:15-17
“The merchant uses dishonest scales, he loves to defraud.” Hos. 12:7
“Hear this, you who trample on the needy, to do away with the humble of the land, saying, ’when will the new moon be over, so that we may buy grain, and the Sabbath, that we may open the wheat market, to make the bushel smaller and the shekel bigger, and to cheat with dishonest scales, so as to buy the helpless for money, and the needy for a pair of sandals, and that we may sell the refuse of the wheat?” Amos 8:4-6
“Woe to those who scheme out iniquity who work our evil on their beds! When morning comes, they do it, for it is in the power of their hands. They covet fields and then seize them, and houses, and take them away. They rob a man of his house, a man and his inheritance.” Micah 2:2
The charges that were laid at the door of the oppressors consisted of::
1. Fraudulent gain. The primary example of this in scripture is those who used scales that were not correctly balanced, making the customer think that he was getting a bigger quantity of grain for his money than he really was. A contemporary example of such type of oppressors would be the executives involved in the accounting scandals of the past couple years (like Enron, Adelphia, and MCI Worldcom). They gave misleading financial information to make their companies’ stocks look more profitable than they really were. This caused the stock’s value to go up, and they cashed in their shares at a much higher profit.
2. Bribery. Those in charge of governing granted special favors, concessions rulings, etc. to those who would pay them the most money. An example to fit this profile is the Guatemalan government during the first half of the 20th century. Officials frequently took bribes from the banana-producing United Fruit Company (later United Brands, now Chiquita), in exchange for land grants and special monopolistic privileges. Of course, United Fruit was an equally guilty party by offering the bribes in the first place.
3. Seizing the property of others by violence. Having failed to obtain fields and houses through legitimate means, these men took the property of others by force. One key Biblical example is King Ahab, who had his neighbor Naboth killed so he could take possession of his vineyard, which Naboth had been unwilling to sell him (1 Kings 21)
4. Not defending the rights of the poor in court. As we have noted, the poor had certain legal rights to the resources of others in the OT law (interest-free loans, food sold at cost). Sometimes people would deny these rights. In Nehemiah 5, certain members of the covenant community had to borrow money to pay the king’s tax. However, the lenders charged them interest, which was forbidden. Nehemiah did defend them in this case, but others in this type of situation apparently didn’t. In this sense, redistribution of resources was part of OT justice. However, the amount of redistribution was quite modest.
Thus, the mere fact of economic inequality is not in and of itself in violation of Biblical principles. In fact, the Bible acknowledges that sometimes inequality is the result of personal choices.
Sometimes poverty is caused by irresponsibility and sloth;
“I passed by the field of the sluggard, and by the vineyard of the man lacking sense; And behold, it was completely overgrown with thistles, Its surface was covered with nettles, And its stone wall was broken down.” Prov. 24:30-31
Some people become wealthy through the results of their diligence and creativity. The Bible affirms this, and does not prohibit it.
“Poor is he who works with a negligent hand, but the hand of the diligent makes rich.” Prov. 10:4
Charles Colson writes,
“The accumulation of wealth in itself is not treated as evil in scripture. Men like Abraham and Solomon were very wealthy. Sometimes wealth is even a reward for spiritual faithfulness…”[Cols.HNSWL.385]
Now, scripture clearly states that riches can be a spiritual danger. Colson continues,
“…Scripture does, however, warn against seeking wealth as an end in itself or using oppression and cruelty as means for amassing it. Paul called ‘the love of money’ (though not money itself) ‘a root of all kinds of evil’ (1 Tim. 6:10) and Old Testament prophets warned that wealth easily leads to spiritual complacency and even disobedience to God (see, for example, Deut. 31:1-21; 2 Kings 20:12-18; Ps. 49; Amos 6:1-4).” [Ibid]
However, our main concern here is “is it against Biblical principles for a society to allow people to be wealthy?” The answer is no.
Wages - Remarkably, the Bible doesn’t say very much about how much a worker shall be paid. Colossians 4:1 issues a general command, urging masters to provide their slaves with what is “right and fair”. Likewise, Deuteronomy 15:12-15 issues certain commands regarding the treatment of fellow Hebrews who had sold themselves into servitude. They were to be set free in the seventh year of their term, and the master was commanded not to send him away empty-handed, but to liberally supply him “from your flock, your threshing floor, and your winepress.” However, low wages did not seem to be as much a concern of God’s as much as dishonest scales, bribes, swindling, and physical violence against the poor, coupled with the forcible seizure of what little property they had. James 5:1-6, which promises judgment on “rich oppressors”, condemns them for failing to pay the workmen their wages. The emphasis, however, is not that the agreed wages were too low, but that the wages that were agreed on were not paid at all.
In an economic system where an employer is free to offer his employees whatever wage he wishes (and it appears that this was always the case in biblical societies) we can expect that the wage offered will fall somewhere between two amounts. If a wage is so low that a prospective worker can make a higher wage elsewhere, or it is so low that not working at all is more attractive, the employer will be forced to raise his wage up to the point that the employee will come to work for him. This is the lowest possible wage that the employer can get away with paying, and in light of scripture, employers shouldn’t simply try to pay this lowest wage. They should examine themselves and determine if the wages that they are paying are honoring and pleasing to God. While scripture doesn’t set a concrete amount that a person should be paid, the principle of loving your neighbor as yourself can be the guide here. Employers should ask themselves, “If I were the employee, would I perceive this wage as right and fair?”
The other point that marks the very top wage that we can expect is the point after which it is not economically feasible (I.e a profit that is reasonably competitive with other business opportunities) to employee that person. This will vary depending on the value of the goods that a person can produce. For example, a software engineer might earn $80K a year, while a fast food employee might make $11K. Why can’t the fast food worker be paid as much as the software engineer? Because an employer will not receive nearly as much revenue from what the fast food worker produces in a year, unless customers are suddenly willing to pay $20 or more for a fast food meal. Since this isn’t going to happen, the wage cannot be expected to come close to that of a software engineer. There is no hint in scripture that wages must exceed this point of economic feasibility. On a purely practical note, employers who are asked/required to do so, either through laws or employee demands, simply aren’t going to employ that person.
While the Bible doesn’t systematically call for a particular economic system, a system that is in alignment with Biblical principles will:
1. Provide for the basic material needs of those who cannot provide for themselves.
2. Allow private ownership of property and the means of production, and provide legal protection to those who are the legitimate owners.
3. Be conducive to creating jobs, which allows people to fulfill the Biblical ideal that each person to earn their own living,
4. Allow each person to obtain the necessary tools to earn a living (in modern, technologically advanced societies, education/job skills are the necessary tools).
5. Permit economic inequality, after the needs (not necessarily wants) of the less fortunate have been met, as long as the wealth was not gained through fraud and deceit. The government is to treat these as crimes, punish the guilty, and make provisions for restitution to the damaged party.
What Are The Options?
At this point, we need to compare the major economic systems that we have as options, and some of their variants. This will also allow me to introduce some important economic principles that I will refer back to during the next three essays. These are intended as general principles. There are nuances and qualifications that could be made to much of what follows. For the purposes of this series of essays, however, it should suffice. And to help the reader visualize these things, we’ll use stories and illustrations throughout.
Let’s start our first tale off in the year 1954 with three Southern Californians named Ted, Ed, and Fred. Ted is an engineer for an airplane manufacturer, but has aspirations towards owning his own business. Ed and Fred are unemployed at present.
One day, Ted is driving home from work near the coastline, as he has every day for years. But today, he notices something. The number of people out surfing today seems to be quite a bit more than there was a year or so ago. This means that the demand for surfboards is increasing. So, Ted says to himself, “Why not start a business that makes surfboards?” He goes home, looks through some catalogues to see how much money surfboards are selling for, and estimates the cost of the raw materials and labor needed to make one. He also estimates the cost of renting a small shop to work in. After looking over the figures, he determines that he can earn a better income by starting his own business than he can working at his job.
To get started, though, he’s going to need money for start-up costs. He has one main asset, his house, which he bought about 5 years ago. In that time, he has paid off part of his mortgage principal, and it has also appreciated in value, so he‘s got a fair amount of equity in his home. He goes down to the bank and takes out a loan, using that equity as collateral, just in case he can’t pay the loan back. He takes the money, rents out a small warehouse, and begins work. Initially, sales are slow, but after a while, they get on track. The business is profitable, and after a while Ted decides to hire several employees. Among them are Ed and Fred, who are employed to make and finish boards.
There are many buyers of the boards, of which one is a gentleman named Ned. Ned is a skilled worker with $50 of discretionary income per month (not bad for the fifties). He has pretty much everything that he wants and needs, so usually that $50 will go into stocks and bonds. But in July of 1958, however, he sees the surfboards that Ted’s company is producing. He likes the look of them, and he has several friends who have taken up surfing, and he thinks that it would be fun to try. So, this month, he spends $30 of his $50 on a surfboard.
Now, all of the parties here gained during this month in question. We note several things;
1. Ted gains on the exchanges here. He paid workers to make the boards, but because he made a profit by selling the surfboard, he didn’t have less money because he paid his workers. Instead, he has more.
2. Ed and Fred gained on the exchange. They didn’t pay any of the parties anything, except their time and effort, for which they were compensated. By participating in these events, they have more money than they had before.
3. Ned paid for the surfboard. He bought it and enjoyed it. It was worth more to him than the $30 that he could have put in the bank. But even he has more money than he had before. He still has $20 more in the bank than last month.
These points are important ones. One of the biggest fallacies made by people as applied to economics is the zero-sum fallacy. Basically, it says that if one person gains wealth, someone else must have lost wealth. And initially, this would seem to make sense. After all, for Ted to make the $30 sale, Ned had to give him that money. It would be true - if Ned was not employed, there were no jobs available, and he was not receiving a paycheck every two weeks. But since he is, he gains $20 in this month, and then goes back to gaining $50 every month. What’s more, he has an asset (the surfboard) that he could conceivably sell as used for perhaps $10-$20. (Of course, if Ned were a free spender who lived beyond his means, using debt to buy things that he can’t pay for, then his wealth would be decreasing, but he does not).
Back to Ted. When Ted begins, he is the only worker in his business. He must wear many hats, handling production, design, bookkeeping, and sales and advertising. He performs adequately in these areas, but being an engineer, his skills and aptitude are more inclined towards the design part of the process. As the business grows, he can hire people who are more skilled at the other functions, causing his business to operate more efficiently and profitably.
What Ted has achieved at this point is called an economy of scale. The larger business operation allowed him to more efficiently allocate labor. There are other economies of scale that he can achieve also. As he grows, he begins to buy raw materials in bulk quantities, and he receives quantity discounts (I.e. he’s able to pay a lower cost per unit than he was before). Also, machinery or equipment that was not worth purchasing based on his previous sales volume become cost-effective. Also, since his business is more established and stable, he is able to borrow money for financing needs at a lower interest rate than he was before.
All of these things allow the wealth creation for Ted to kick into a higher gear. To be sure, there are dangers of getting big that Ted will have to watch out for. For example, he will need to allow those under him to make more decisions. Otherwise, precious time will be lost waiting for him to receive the information regarding a certain problem, review it, and then communicate the decision back to his subordinates. However, growing a business to a larger size is an important step in creating wealth.
By 1960, it’s evident some changes are needed. When Ted started his business, his boards were made out of balsa and redwood. These boards took a long time to finish once they were copied from a template. However, now it is possible to make boards out of foam or fiberglass. They can be finished in much less time. In fact, one person can make two boards in the same amount of time that it took to make one before. At present, Ted doesn’t need two workers to make boards. He only needs one. He decides to lay off Fred from his job. Fred has been a good worker, but he just isn’t needed. Fred spends a few months looking for a job, but there are growing businesses around him, so he eventually finds another job.
However, in 1962, sales for Ted’s business spike, as the Beach Boys hit the Top 40 charts and draw even more people into taking up surfing. Even though the materials eliminated one worker, Ted now finds that he needs to hire another person, named Jed.
What happened here is that the productivity of Ted’s company improved. After needing two people to make all of the boards that they needed, they could make the same amount with just one. But now, the same amount of people as before (two) are making twice as many boards. In the end, this is what drives real economic growth and prosperity. If an economy is growing strong, and labor is in high demand and short supply, wages will rise. However, if the amount of goods and services available for sale in that nation do not increase, they will also be in high demand and short supply. Their prices will rise, eating away the benefits of the increased wages. But if the nation is producing more goods and services, and thus is increasing their supply, prices for those goods will remain constant or even drop, allowing the labor force to benefit from their higher wages.
For nearly a century after the founding of the United States, the majority of the labor force was employed in agriculture. Now, the number is about 3 percent. Because of technological advances, fewer workers are needed to produce a sufficient amount of food to feed the population than before. Initially, this created job losses. However, in the long run, this freed up more workers to produce other goods and services that could not have been produced before due to the lack of available workers.
During the Reformation and Enlightenment periods, Mercantilism was the leading school of economic thought in the Western World. This school did not grasp the concept that the availability of goods and services is what makes a prosperous society. Mercantilism essentially believed that it was “all about money.” It was believed that the key to prosperity was acquiring and keeping a large national treasury. Here are some of the behaviors that resulted from this thought process.
1. A quest for gold acquisition. Explorers were sent out at considerable expense to find gold. This would increase the amount of gold in the national treasury, but it did not increase the amount of goods and services available. So, in terms of increasing the nation’s purchasing power, it did absolutely nothing. Plus, the men who were sent to find gold weren’t able to produce food, swords, clothing, etc.
2. Protectionism. The increase in gold might have increased the nation’s purchasing power, if they has allowed goods and services that were produced in other nations to be sold in their country. However, the thought process at the time saw this as allowing money to flow out of the national treasury and into the coffers of another nation, hence making the nation poorer. But they didn’t realize something. What if one country has a lot of good farm land, but few forests? And what if the next country has the opposite problem? The first country will have a surplus of food, but what about wood for homes? There will be a shortage. The second country has the same problem, only they have a surplus of wood. But if they decide to trade, then the shortages can be corrected. Even if they trade some of the same goods, competition will increase. Competition is important, because it forces a company to produce a higher-quality product at a lower price.
3. Protection of established companies from domestic competition. In 17th century England, for example, it was illegal to set up a business that competed with certain established companies. There are actually two possible motives for this policy. Sometimes it is done out of purely nationalistic reasons. In that case, it is believed that the failure of certain businesses would be harmful to the nation. Another reason is simple corruption: certain aristocratic individuals want to protect their established market position, and government officials, out of friendship and/or bribery, comply. This has the same effect as protectionism (less competition in the market place).
Now, back to Ted again. Ted lives in a country that has a capitalist, or free market economy. He owns his own business, and the factors of supply and demand determine how much he can charge for a surfboard, and also how much he pays his workers.
Now, during the early 1950s, while Ted is getting started, there is a coup by Soviet-backed Marxist guerrillas on the South Pacific Island of Tonga Tonka. The newly installed government sets up an economic system that they maintain is “more fair” than the one that operates in the United States. In this wonderful new system, workers will all be paid the same, regardless of their skill level. And there will be no private business owners, as the government owns all of the means of production, including land, factories, and raw materials. Prices for finished goods will be based on what’s “fair”, not on the amount that greedy businessmen can charge. And everyone will be guaranteed a job. This is called a command, or socialist economy.
The government decides that since surfing is getting popular elsewhere, surfboards are one of the goods that it should produce. Ted’s counterpart, Te’afa, will be in charge of the State Surfboard Department. All seems well.
But in fact, it is not. This system will eventually lead to waste and economic disaster for the following reasons.
1. The prices charged for goods are based on what is supposedly “fair”, not on the supply and demand of the good. This creates a whole set of problems. When Ted starts out making his surfboards, he catches a high price since there are few competitors. This is a situation of low supply and high demand. Eventually, though, more and more entrepreneurs do their math like Ted did and decide to enter the market. The increased competition results in the supply of boards rising, and Ted decides to lower prices and/or lessen production, lest his shop pile up with boards. Te’afa, however, is only allowed to charge what the government decides was “fair”. So if the price is held to a level that is less than people would be willing to pay for them, there will be a shortage of boards. If the price is held higher, boards will start piling up.
So let’s suppose that the government learns from this mistake and decides to be more flexible. It will raise prices when there is a shortage and lower them when there is a surplus. But it hasn’t solved all of its problems.
2. Profit and loss analysis, which makes rational planning possible, is impossible in this economy. The government figured that surfboards were a worthwhile product to produce because Ted and others were starting to make them in droves. But how did they know to produce them? Because they analyzed how much money could be made. Conceivably, someday there may not be that much money to make. The price that surfboards sell for may be less than it costs to make them. At that time, commercial production of them would be stopped. But Te’afa cannot know how much it costs to produce a surfboard. The state owns the buildings that he uses, and it mines and owns all of the raw materials. There is no market, based on supply and demand to tell him how much they are worth (and subsequently, how plentiful or scarce they are). The state pays its workers a wage, but it is simply an arbitrary number that the government decided was “fair”. It has nothing to do with how scarce or plentiful the labor is. Te’afa now has the flexibility to lower prices when he has a surplus, but he does not know at what price he should stop producing surfboards altogether. What if the price drops down to that of a wooden chair? At that point Ted, living in the United States, could check to see if chairs are cheaper to produce. If they are, then he may very well switch over to that business.
Ted wouldn’t be the only one who benefits in that case. The whole society benefits. The productive inputs of a society (wood or plastics, labor, shop space) are limited. Demand for surfboards and chairs may be the same at this stage, but producing chairs consumes less of these inputs, leaving them to produce something else. But Te’afa will go on producing surfboards, and thus, wasting resources. Eventually, the amount of goods and services available (remember, this is the true measure of whether a society is poor or affluent) will eventually be less in Tonga Tonka than in the United States.
One of Karl Marx’s criticisms of capitalism was his belief that the desire for profit would lead capitalists to invest increasing amounts of resources in producing goods for which demand would eventually slow. He believed that this would lead to these resources being wasted. This does happen in a capitalist system, but when it does, profits shrink or disappear, telling the capitalist to stop investing those resources in that product. When It happens to a sufficient number of products, this usually causes a recession. But after the appropriate adjustments and redirection of productive inputs are made, the economy recovers. In a command economy, however, one can never know when to stop making something. And one cannot know when to start making something.
3. The central planners cannot operate efficiently. The central planners may try to keep up with changes in supply and demand in their allocation of production inputs. They lack the more concrete information of profit and loss analysis, but they try to go on anecdotal evidence. But there are still more problems.
Ted only has to measure supply and demand for one small segment of the economy. Even with the limited scope and the profit/loss information available to him, he will make mistakes from time to time. But the central planners have to try to guess at supply and demand for an entire economy. That is, they have to know what the market is for every single item produced. This is simply too much information (and remember, it is information that is inferior in quality) to process and then coordinate the respective activity in a manner that is timely enough to meet the changes in demand that will take place.
All of these problems are very bad. But it gets worse even still.
4. There is no incentive to make even the largely futile efforts described here. The central planners get paid the same and will keep their jobs no matter how they allocate resources, so why bother going to the effort of trying to keep up with supply and demand? And Te’afa, just like the central planners, has the right to work, he does not get fired even when he makes surfboards of poor quality. Ted has to do both, or he’s out of business.
At this point, we need to examine one of the key criticisms against capitalism - that it encourages selfishness. Indeed, Adam Smith, the Enlightenment thinker who spelled out why capitalism would work, built much of his argument on the necessity of people seeking their own self interest. Didn’t Ted start making surfboards based on his own self-interest? And doesn’t this go against virtually all of Christian teaching, which urges us to deny ourselves and seek the well-being of others?
The difference is this: Smith, following John Locke, believed that humans were naturally good. Selfishness was something that had to be cultivated. Christians realize that humans are naturally evil and self-centered. Selfishness doesn’t need to be cultivated in humans, it simply exists in them, and always will on this side of eternity. It is something that the Christian must guard against, but the reality is that most people will behave selfishly. Only a capitalist system can channel this selfishness into benefiting others. In Ted’s world, the customer, employer, and worker must benefit from their respective relationships. If they don’t, one of them will withdraw. Ned will not buy surfboards if the quality of the board is too low or the price is too high. Ed, Fred, and Jed must be more satisfied with the pay, work environment, and job security that they enjoy working for Ted, or they will not work for him any more. And if the profit that Ted makes from his business drops below what he could make by going back into aerospace engineering, he will be strongly tempted to close his shop.
The bottom line is that as much as it is possible, those looking to solve economic problems must prefer solutions in which all parties benefit from their respective relationships, since that helps assure their continued participation in those relationships.
This doesn’t mean that people won’t ever engage in relationships where they don’t benefit. People do sometimes contribute their excess money or free time to causes that benefit others that cannot pay them. This is a righteous and necessary thing. But it is not realistic to expect that entire societies will produce and buy the bulk of their goods and services unless it is in their perceived self-interest to do so. However, as we shall see, a capitalist system does need at least some moral underpinnings, restraint, and unselfishness to work.
The Role of Government
Periodically, Ted pays taxes to various levels of government. These taxes that Ted pays to these entities are used to pay for things like administration, judiciaries, education, social services, roads, law enforcement, and the military. At the most basic and direct level, Ted does not benefit from the taxes he pays as he does when he pays his workers. The taxes do not produce something that he can sell. However, these things are widely recognized as providing for the common good of society. The market and private organizations can provide for some of these things, but for the most part, it is impractical to rely on the private sector to provide them.
Ted benefits from these taxes in several ways.
1. Education - Not only do education expenditures go to educate Ted’s children, but they provide Ted with skilled and knowledgeable workers. Without these workers, his business could not function (Indeed, how could Bill Gates have amassed his fortune without skilled software engineers and programmers?). Also, other educated workers, even if they aren’t directly employed by Ted, provide him with constant technological innovation. When Ted finds ways to apply these new innovations to his business, his productivity and product quality increase.
2. The military - Ted lives in a country where he is free to pursue his dream of owning his own business. Over the years of his countries’ history, there have been people who have wished to take this freedom away. The military, whether by force or deterrence, has not allowed this to take place.
3. Judicial system - Initially, Ted’s business sells some surfboards to walk-up customers who pay cash. However, as he expands, he begins to sell surfboards to distributors, who want to purchase the boards on credit. He isn’t personally acquainted with any distributors, so to sell to any he must make deals with complete strangers. How does he know that he can trust the strangers to make payment? Because he has contracts that are legally enforceable in a court of law. Every year, a small handful of his buyers will go bankrupt and be unable to pay. However, the vast majority pay, some because they have integrity, and some because they know that if they don’t, they will lose when Ted sues in them in court. This will go on their credit histories and damage their ability to obtain credit elsewhere. It is this ability to do business with strangers that allows Ted to expand his business and obtain the economies of scale that we discussed earlier.
4. Law enforcement - There are criminals who would like to break into Ted’s shop and help themselves to whatever inventory, tools, supplies, cash, or furniture that Ted has in his shop. Having a police force doesn’t totally remove the threat of theft, but they create a fear of getting caught that does deter a substantial number of would-be criminals from stealing. Jails and prisons keep those who are caught from the rest of society. It should be noted that law enforcement expenditures are not by themselves a positive good. They merely prevent bad things from happening.
3. and 4. illustrate why capitalism needs an entrenched moral fabric to function. What if the court system that Ted used was filled with judges who ruled based on which party gave them the most money, and not on what the law required? He could not extend credit and grow his business like we described.
And over the course of Ted’s shop ownership, the crime rate will vary. When crime is high (reflecting a moral shift from respecting the law to disrespecting it), more money will need to be spent on police and prisons. This drains resources, both in terms of money and labor, from producing goods and services and into law enforcement. It is necessary to do so, but the nations’ material well-being would be higher if crime was lower.
Ted’s taxes also go to pay for social services, like unemployment compensation (to help Fred when he loses his job for a few months). The main purpose of this is to help those who are unable to provide for themselves, which, we have noted, is in accord with Biblical principles.
Now, in Ted’s world, there is a softer form of socialism that is different from the economy in Tonga Tonka. It exists in a European country called Grand Fenwick. In this country, capital and production are owned by private businesses and not by a state-controlled central bureaucracy. In addition, prices and wages are largely determined by the market, not the government. It has set up a social services system that isn’t just designed to meet the needs of those who aren’t able to take care of themselves, but to equalize the incomes between different economic classes. The reasoning behind this policy is similar to that of the rulers of Tonga Tonka. It just isn’t fair that some people should have a lot more money than others. To pay for this income redistribution, incomes beyond a certain level are taxed at a very high rate.
But this is actually counter productive. One of the things that leads entrepreneurs to strike out on their own is the opportunity to make considerably more money than they do at their current jobs. In Ted’s case, his aerospace job pays $10,000 a year (Once again, we are talking in 1953 dollars). Let’s say his tax rate is 30%. This leaves him with $7,000 a year. As he looks into starting his own business, he estimates how much money he can make by doing so. He calculates a range of scenarios, but he determines that $20,000 is the most likely figure. After taxes this leaves him with an additional $7,000 a year. This, he figures, is worth the hassles and long hours that starting his own business will involve. He also figures that it is worth the risk that he is taking. Remember, Ted needs to take out a second mortgage on his home to get started. His estimated income is just that, an estimate. If he’s wrong, and he fails, he must declare bankruptcy and sell his house, which would leave him without any substantial assets. But the potential reward of a substantially higher income more than offsets all of these drawbacks.
Now, in Grand Fenwick, any income beyond $10,000 is taxed at a rate of 60%. This means that if Ted lived there, his estimated additional income after paying taxes is $4,000. That’s 43% less than he would make, after taxes, in the United States. Will this dissuade him from starting his own business? Maybe, maybe not, but it can only make it less appealing and it is bound to discourage at least some prospective entrepreneurs.
If Ted chooses not to start his own business, it means that Ed and Fred will not be hired, and Ned will have one less option as to where to purchase a surfboard. The bottom line: Taxes are necessary, and should be high enough that the state can pay for all of its necessary functions. But if they are too high, they discourage entrepreneurial initiative, resulting in fewer jobs and less goods and services produced.
(I anticipate that this will probably be the most controversial assertion made in this essay. I will be presenting the empirical evidence for this over the course of the next three essays, particularly the fourth).
One version of capitalism is called laissez-faire capitalism. This view holds that the government should never intervene in the economy, and if that is done, things will be much better. .
However, it is usually recognized that there are sometimes some good and compelling reasons for at least some regulations. There is nothing to be gained by allowing companies to dump toxic waste in rivers, so laws are passed against that practice. Also, if banks are allowed to lend out all of their deposits, the bank will have no money to pay depositors who want to withdraw funds. So, banks are required to keep a certain percentage of their deposits on hand.
However, the laissez-faire view is correct to note that some regulations, although they are well-intentioned, may have unintended consequences that cause other problems or make the existing ones worse. One example is price controls. A city may decide that prices for apartments in the city are getting too high. So, they set a law that rents in excess of a certain amount cannot be charged. But this law does not deal with the underlying problem. Apartment prices rise because the supply of apartments is not keeping pace with the demand to rent them. Higher prices send a signal to builders that they should build more apartments. Without this signal, they will not build new units, or at least not as much. In the meantime, an apartment owner may realize that it is actually more profitable for him to convert his complex to condominiums and sell off each unit. In the end, more people will be able to afford rent, but everyone, low-income or high-income, will have a harder time finding an apartment that is available.
In sum, a capitalist, or free market economy, will provide more material prosperity than competing systems. Some government services and regulations may be necessary, but the market can be relied on to provide most goods and services, and it has many built-in mechanisms that can deliver desired results without the government intervening. But there are still some objections that need to be answered.
Monopoly and Manipulation
One rather popular objection to free-market economies is that they lead to monopolies. The argument goes something like this; A number of firms compete in a given market. Some are unable to compete and go out of business. Then the few remaining companies merge, leading to one company either owning a complete share of the market or a very large chunk. At this point, they can raise prices to very high levels, and they can let the quality of their product suffer.
However, unless some very unique barriers to entering that market exist, other people will see that there is an opportunity to make money by entering that market and making a quality product at a lower price. Socialism itself requires state-run monopolies, and while the government may keep prices down, product quality is bound to be poor. In fact, monopolies are usually only able to maintain their power because of government intervention (I.e. the lack of a free market, not the presence of it). For example, the aforementioned United Fruit Company monopolized much of the economy of Guatemala in the first half of the 20th century. It’s primary operation was growing bananas. But it also operated the countries’ only railroad and only major port. The very corrupt government allowed no competition, so United Fruit could set transportation costs to whatever level they wished. This came in quite handy for squashing any local banana companies hoping to export their product. Such economies, where certain firms and individuals’ positions are protected by the government, are more properly classified as mercantilist.
It is also worth noting that the most devastating market manipulation in history, the OPEC oil embargo of 1973-74, was conducted entirely by the state-run enterprises in the Middle East (who were motivated by political objectives), not private oil companies.
Some Final Christian Objections
1. Is material prosperity a good thing? It is something that is even desirable? Is it possible that capitalism might in fact work too well, creating a wealthy nation that feels self-sufficient and learns to trust in that material prosperity instead of God?
It certainly can be the case, but it is by no means determinative. For example, Colleen Carroll’s book The New Faithful: Why Young Adults are Embracing Christian Orthodoxy documents the surprising spiritual hunger of America’s teens and twenty-somethings. This generation has grown up with more prosperity than any other generation in the history of the world, yet many are dissatisfied with the moral relativism of their Baby boomer parents and teachers, and are drawn to Christianity. We should remember that the Holy Spirit can move under any circumstances.
On the other hand, while prosperity has its problems and doesn’t bring spiritual fulfillment, poverty almost always brings great misery and suffering, and the accompanying frustration manifests itself in higher crime and social upheaval. Thus, while it certainly is not the primary thing we as Christians should be concerned with, we should generally prefer that the economies of our communities and societies are strong and perform well.
2. Doesn’t economic growth involve some anti-social components that are quite bad? Doesn’t increased crime create jobs in the form of more police officers? Don’t more divorces create a need for more lawyers, driving up the Gross Domestic Product?
As I’ve mentioned before, higher crime diverts capital and labor into law enforcement instead of in the production of goods and services, where we should prefer that they be. And interestingly enough, economists Samar K. Datta and Jefferey B. Nugent concluded, based on a study of fifty-two countries between 1960 and 1980, that for every point increase of lawyers as a percentage of the work force, there was a corresponding drop in economic growth between 4.76 to 3.68 percent. J [DeS.TMC, 199]
3. Isn’t a continuously growing economy dependent on materialism and consumerism and the quest for more and more trinkets and the related advertising that tells us that we need more and more things?
I would propose that a society driven by consumerism and materialism ultimately will cease to grow economically. Consumerists tend to live beyond their means, regardless of their income level (we’ve all heard the stories of professional athletes who made millions, but ended up bankrupt.) They take on large debts because they are driven to accumulate as many toys as soon as possible. If everyone lived like this, in time people would default on their debts at a very high rate, and they would not be able to get the credit to sustain the previous level of consumer spending. Not only that, without adequate saving, there will not be any capital to research and produce any additional goods.
In reality, though, even in a highly consumerist society like the United States (where credit card debt is a problem), there are plenty of frugal, financially responsible people who save and invest. When useless, faddish trinkets are released on the market, the frugal person isn’t swayed by the flashy advertising. He doesn’t buy them, while the consumerist buys them immediately. When innovative new gadgets like computers come out, the frugal person might see that the good is useful and worthwhile, but at the introductory high price, he either can’t afford it or doesn’t believe that it is worth paying that amount of money, and he doesn’t buy it. However, if the item is highly useful, he is willing to pay a lower price if it comes down in the future. As more and more companies enter the market for the gadget, prices drop, and he buys it.
Now, which item caused the economy to grow more? The trinket was bought by only a few people. It created a few jobs, but not many. And because the sales volume never got very high, it created some wealth, but not a tremendous amount. The gadget, on the other hand, was so worthwhile that even the most irrepressible tightwad saw the value in purchasing one (at the right price, of course), even if it wasn’t a necessity.
Think of it this way. Twenty-five years ago, when home computers were just being released on the market, how many of us actually needed one? Only a few bought them. But, throughout the eighties and nineties, computers became increasingly cheaper, and more and more of us bought them. As they grew more powerful, newer uses were discovered for them. The development of the internet allowed us access to much information that had previously been inaccessible to the average person. It also allowed us to keep in touch with loved ones and conduct personal business more efficiently. Of course, related products like software and printers also were in demand. All of this created many jobs and growth in the GDP. Also, another sector of the economy that has enjoyed robust growth during the last eight years (even in the current economic slowdown) is housing. The lowest mortgage interest rates in history have spurred a flurry of home buying, and now an all time high of American households (just over two-thirds) own their own home. Homes are a highly worthwhile item, and are widely recognized as a sound investment. Now, which created more wealth and more jobs, computers and homes, or pet rocks and friendship bracelets?
Of course, just because an item isn’t something that everyone buys doesn’t mean it isn’t useful (equipment for the handicapped, for instance). And even the most worthwhile goods can be used for sinful purposes (like using a computer to access pornography). But it is ultimately the most widely useful and worthwhile goods that serve large numbers of people that drive economic growth.
[Col.HNSWL] Colson, Charles and Pearcey, Nancy. How Now Shall We Live?. Wheaton, IL: Tyndale, 1999
[DeS.TMC] DeSoto, Hernando. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic Books, 2000.