Thursday, March 03, 2011
Christian Economics: Trade and Money
Christian Economics, part 3: Trade and Money
Part 1
Part 2
Proverbs 11:26 The people will curse him who withholds grain, But blessing will be on the head of him who sells it.
Trade is a fundamental part of our economic life. Without trade, life would be very difficult. Think for a moment of what things would be like if you were required to produce everything you used for yourself. Even with a great deal of training and effort, any of us would at best be able to manage a very rudimentary survival, and only if we are physically strong and healthy.
Even the simplest, most isolated tribe will trade. The men will hunt while the women stay home and tend the gardens or farms, cook and care for the children. There is trade between the men and the women- the men provide many raw materials such as meat and animal skins while the women trade services such as refining those raw materials into usable goods for the men. The men specialize at what they can do most effectively and the women generalize in several other areas. The result is that both the men and the women, through trade, are wealthier than they would otherwise be.
Soon, one tribe sees that another tribe has very good spears, while they are good at making clothes out of skins. So the spear tribe realizes that they can make extra spears and trade them to the other tribe for skins. Both tribes are better off through the trade. The spear tribe makes more spears than they actually need, and value the extra spears less than they value the high quality clothes from the other tribe, which they would not be able to produce themselves. Before, one tribe would have good spears and bad clothes, and the other tribe would have bad spears and good clothes. Through trade, both tribes have good spears and good clothes. Everyone is better off through trade. Soon, more tribes learn of the good spears, and they too wish to trade for them, trading perhaps their own raw materials, perhaps canoes or bows or pottery. This goes on to the point where the spear tribe realizes that it is now more profitable for them to make spears than it is to do anything else. So they stop hunting, stop farming, spend some time making good tools which they never would have made just to make spears for themselves, and spend most of their effort now cranking out high quality spears for all the rest of the tribes, who trade all the other goods the tribe needs in exchange. The tribe now grows far richer than they ever would have been otherwise, and everyone around has great hunting spears.
Now money comes into the picture. It is very convenient to have some store of wealth. Maybe the spear tribe has enough meat for now, but they'd love to be able to get some meat later after the hunting season is over and few people are buying spears. So they accept payment in rare glass beads instead, intending to use those beads later to trade back for food. The beads act as money, a store of wealth.
For something to be effective as money, it needs to be recognizably valuable and non-perishable. It should be convenient to move around. Its weight and size needs to be much smaller than the goods that it purchases, relative to its value. Things such as glass beads were good money for some people at certain times, but as glass beads became much easier to manufacture, they lost their value. Precious metals were much better. Gold, silver and copper are great stores of value. They are attractive. They are very useful for making jewelry, and in the modern age even have many industrial applications, and therefore have intrinsic value. There is a limited supply of each of them- they cannot be manufactured from other things, but must be mined out of the ground. These metals have very distinctive properties of weight, color and malleability, which makes them very difficult to counterfeit. This is why these metals have so commonly been used for money. Money therefore acts as a store of wealth beyond its own ability to raise one's standard of living.
So this raises the question of price. What is the right price for something? When we understand what trade is, we can immediately understand the answer to this question. The right price for something is the price that people are willing to pay. The spear tribe doesn't truly determine the price of its spears. The people who want the spears decide what they are willing to pay. Different people will value them differently. A tribe with no access to metal at all will value those good spears more highly than another tribe that can already make pretty decent spears on their own. Price therefore is determined at its most basic level by the value people place on the goods they are purchasing.
Simply put, this is all trade is. Most of us trade our labor for other goods. We get specialized at particular kinds of labor in order to maximize the worth of that labor. We then trade that labor for money, and use the money to buy the other goods and services that we need. Some people own property, and trade the use of that property for money through rents. Some people purchase labor, and use that labor combined with their own personal skills, abilities and equipment, manufacture the goods or provide the services that other people desire.
Through this system, everyone's wealth is increased. Each time a transaction in a free economy occurs, both sides of the transaction choose to make the transaction because they believe they will be better off. Just as the trade of spears and clothes increases the wealth of both tribes, so my purchase of aspirin at the store makes both of us wealthier. So when I give away money and get aspirin in return, both of us are better off. The people who sell the aspirin are selling it for more than it is worth to them at the time, and the person who buys the aspirin wants the aspirin more than they value any other purpose for which they could use the money. Therefore both are wealthier for the purchase.
Take a look back at the Bible verse quoted at the beginning of the post. We now see why this is so true. When people freely engage in the marketplace of goods and services, they are better off, and so are the people with which they trade. The more buyers and sellers there are, the better off everyone ultimately becomes. A man might withhold his corn in an attempt to drive the price up, because he is too lazy to produce or harvest, or because of false ideas about what wealth truly is. He might save all of his grain in order to protect himself from some imagined disaster. He would be better off by selling that grain, because doing so increases his wealth and the wealth of everyone around him.
For free trade to occur, there are some important conditions that must exist. There must be rule of law. A man needs to have confidence that contracts will be honored and that goods are what people say they are. This is why false weights and measures are an abomination to God. False weights and measures, along with all other forms of theft, destroy economic relationships which, as we established, lie right at the heart of what it means for us to be in the image of God. This is one of the main roles of government- to prevent theft by enforcing contracts, regulating weights and measures and punishing those that steal from others.
There are of course many complications, caveats and qualifications to the simple model I have outlined above. But much of our wrong thinking about economics comes from failing to understand the basic nature of a thing. We hear that the government should restrict what people can sell or buy, or the price at which they can do so. We see gas prices going up and say, why can't the government do something about it? If we realize that the gas prices are the result of free economic decisions of value between buyers and sellers, then we would know that there is no "right" price of gas, and if we want to bring the price down, we should look at what factors are preventing trade or limiting supply, all the time realizing that there are free economic actors on both sides of the trade, and it is just as legitimate for the sellers of gas to want to make a profit as it is for the buyers of gas to get cheap gas.
George Orwell once said, "To see what is in front of one's nose requires a constant struggle." We have had a great many highly trained academics from Harvard and Yale, men and women who have written long books, held many high academic, commercial and government positions, who made a great deal of money and have many letters after their name, who told us the present economic crisis could never happen. And yet it happened. They based their thinking on the premise that ingenious state and corporate activity could repeal the basic laws of human interaction and create wealth out of nothing. But currency manipulations, bureaucratic regulations, political schemes and laws can never create wealth. They can certainly destroy it. But the best the state can ever do is to create the environment where wealth creation happens. The way wealth creation happens has always been the same. Economic actors produce goods and services, and then freely exchange those goods and services for other goods and services that they desire. We need to continually struggle to remind ourselves and others of this very simple truth.
Never feel guilty about making a fair profit, of growing wealthy by providing valuable services and goods to others. God created you to do that very thing. Blessed is the man who sells, and cursed is the man who holds back his God-given gifts from the marketplace of free exchange.
Part 1
Part 2
Proverbs 11:26 The people will curse him who withholds grain, But blessing will be on the head of him who sells it.
Trade is a fundamental part of our economic life. Without trade, life would be very difficult. Think for a moment of what things would be like if you were required to produce everything you used for yourself. Even with a great deal of training and effort, any of us would at best be able to manage a very rudimentary survival, and only if we are physically strong and healthy.
Even the simplest, most isolated tribe will trade. The men will hunt while the women stay home and tend the gardens or farms, cook and care for the children. There is trade between the men and the women- the men provide many raw materials such as meat and animal skins while the women trade services such as refining those raw materials into usable goods for the men. The men specialize at what they can do most effectively and the women generalize in several other areas. The result is that both the men and the women, through trade, are wealthier than they would otherwise be.
Soon, one tribe sees that another tribe has very good spears, while they are good at making clothes out of skins. So the spear tribe realizes that they can make extra spears and trade them to the other tribe for skins. Both tribes are better off through the trade. The spear tribe makes more spears than they actually need, and value the extra spears less than they value the high quality clothes from the other tribe, which they would not be able to produce themselves. Before, one tribe would have good spears and bad clothes, and the other tribe would have bad spears and good clothes. Through trade, both tribes have good spears and good clothes. Everyone is better off through trade. Soon, more tribes learn of the good spears, and they too wish to trade for them, trading perhaps their own raw materials, perhaps canoes or bows or pottery. This goes on to the point where the spear tribe realizes that it is now more profitable for them to make spears than it is to do anything else. So they stop hunting, stop farming, spend some time making good tools which they never would have made just to make spears for themselves, and spend most of their effort now cranking out high quality spears for all the rest of the tribes, who trade all the other goods the tribe needs in exchange. The tribe now grows far richer than they ever would have been otherwise, and everyone around has great hunting spears.
Now money comes into the picture. It is very convenient to have some store of wealth. Maybe the spear tribe has enough meat for now, but they'd love to be able to get some meat later after the hunting season is over and few people are buying spears. So they accept payment in rare glass beads instead, intending to use those beads later to trade back for food. The beads act as money, a store of wealth.
For something to be effective as money, it needs to be recognizably valuable and non-perishable. It should be convenient to move around. Its weight and size needs to be much smaller than the goods that it purchases, relative to its value. Things such as glass beads were good money for some people at certain times, but as glass beads became much easier to manufacture, they lost their value. Precious metals were much better. Gold, silver and copper are great stores of value. They are attractive. They are very useful for making jewelry, and in the modern age even have many industrial applications, and therefore have intrinsic value. There is a limited supply of each of them- they cannot be manufactured from other things, but must be mined out of the ground. These metals have very distinctive properties of weight, color and malleability, which makes them very difficult to counterfeit. This is why these metals have so commonly been used for money. Money therefore acts as a store of wealth beyond its own ability to raise one's standard of living.
So this raises the question of price. What is the right price for something? When we understand what trade is, we can immediately understand the answer to this question. The right price for something is the price that people are willing to pay. The spear tribe doesn't truly determine the price of its spears. The people who want the spears decide what they are willing to pay. Different people will value them differently. A tribe with no access to metal at all will value those good spears more highly than another tribe that can already make pretty decent spears on their own. Price therefore is determined at its most basic level by the value people place on the goods they are purchasing.
Simply put, this is all trade is. Most of us trade our labor for other goods. We get specialized at particular kinds of labor in order to maximize the worth of that labor. We then trade that labor for money, and use the money to buy the other goods and services that we need. Some people own property, and trade the use of that property for money through rents. Some people purchase labor, and use that labor combined with their own personal skills, abilities and equipment, manufacture the goods or provide the services that other people desire.
Through this system, everyone's wealth is increased. Each time a transaction in a free economy occurs, both sides of the transaction choose to make the transaction because they believe they will be better off. Just as the trade of spears and clothes increases the wealth of both tribes, so my purchase of aspirin at the store makes both of us wealthier. So when I give away money and get aspirin in return, both of us are better off. The people who sell the aspirin are selling it for more than it is worth to them at the time, and the person who buys the aspirin wants the aspirin more than they value any other purpose for which they could use the money. Therefore both are wealthier for the purchase.
Take a look back at the Bible verse quoted at the beginning of the post. We now see why this is so true. When people freely engage in the marketplace of goods and services, they are better off, and so are the people with which they trade. The more buyers and sellers there are, the better off everyone ultimately becomes. A man might withhold his corn in an attempt to drive the price up, because he is too lazy to produce or harvest, or because of false ideas about what wealth truly is. He might save all of his grain in order to protect himself from some imagined disaster. He would be better off by selling that grain, because doing so increases his wealth and the wealth of everyone around him.
For free trade to occur, there are some important conditions that must exist. There must be rule of law. A man needs to have confidence that contracts will be honored and that goods are what people say they are. This is why false weights and measures are an abomination to God. False weights and measures, along with all other forms of theft, destroy economic relationships which, as we established, lie right at the heart of what it means for us to be in the image of God. This is one of the main roles of government- to prevent theft by enforcing contracts, regulating weights and measures and punishing those that steal from others.
There are of course many complications, caveats and qualifications to the simple model I have outlined above. But much of our wrong thinking about economics comes from failing to understand the basic nature of a thing. We hear that the government should restrict what people can sell or buy, or the price at which they can do so. We see gas prices going up and say, why can't the government do something about it? If we realize that the gas prices are the result of free economic decisions of value between buyers and sellers, then we would know that there is no "right" price of gas, and if we want to bring the price down, we should look at what factors are preventing trade or limiting supply, all the time realizing that there are free economic actors on both sides of the trade, and it is just as legitimate for the sellers of gas to want to make a profit as it is for the buyers of gas to get cheap gas.
George Orwell once said, "To see what is in front of one's nose requires a constant struggle." We have had a great many highly trained academics from Harvard and Yale, men and women who have written long books, held many high academic, commercial and government positions, who made a great deal of money and have many letters after their name, who told us the present economic crisis could never happen. And yet it happened. They based their thinking on the premise that ingenious state and corporate activity could repeal the basic laws of human interaction and create wealth out of nothing. But currency manipulations, bureaucratic regulations, political schemes and laws can never create wealth. They can certainly destroy it. But the best the state can ever do is to create the environment where wealth creation happens. The way wealth creation happens has always been the same. Economic actors produce goods and services, and then freely exchange those goods and services for other goods and services that they desire. We need to continually struggle to remind ourselves and others of this very simple truth.
Never feel guilty about making a fair profit, of growing wealthy by providing valuable services and goods to others. God created you to do that very thing. Blessed is the man who sells, and cursed is the man who holds back his God-given gifts from the marketplace of free exchange.
Labels: economics
