Tuesday 30 December 2014

A Preference for the Market: Because it Works



In my last posting I argued that the Bible leads us to prefer the free market, private ownership and enterprise because it is the economic system that best achieves biblically derived economic goals. In this post, I will begin to substantiate that conclusion by showing that it works.
 
As a starting point for our analysis, I posited that “as God's stewards, we must develop the world to enable man and creation to glorify God.” As the parable of the talents implies, that includes fruitfulness in the economic realm[1]. An economic system has to provide for the material needs of all so that they can exercise this mandate.  Good stewardship also means that we need to use our God-given resources as effectively and efficiently as possible. We, as individuals and as society, may not waste the resources God has entrusted to us. When we, then, evaluate possible economic systems, major questions to ask are: “Does it work? Does  it work efficiently?” 

Government economic operation inefficient

Recent world history has made it perfectly clear that for a command economy the answer to those questions is a resounding "no". In fact, “all plausible alternatives to capitalism have now evaporated.”[2] The collapse of the iron curtain has shown that an economy rigidly controlled by the government led to the production of "shoes that fit nobody, shoddy workmanship and mostly empty shelves in the stores." [3]   Consumer goods ranging from necessities, such as food, to luxuries such as cars as well as intermediate goods required for production are typically in short supply. In fact, it has been argued that shortages distinguish socialism from capitalism.[4] North Korea and Cuba still provide vivid examples of this.

Moreover, enormous losses from bad decisions as well as fraud have bedeviled government enterprises around the world. A 1995 World Bank publication, for example, described a Turkish state-owned coal mining company that generated losses per worker equal to six times the per capita national income, a state-owned power utility in the Philippines that shut off electricity for seven hours a day in many parts of the country and a state sugar-milling monopoly in Bangladesh that employed 8,000 unneeded workers and kept the price of its sugar at double the world price.[5]   Many countries throughout the world experimented with central planning and nationalization during the 1960's and 1970's in order to promote economic growth and development. But “the dream proved to be unrealizable”. State companies were less productive and innovative than the market and turned out to create enormous drains on the treasury and reduced rather than increased growth.[6]

Moreover, the governments of the mixed economies of the West have also shown themselves to be seriously limited in their ability to manage the economy. There is a growing awareness that governments have a tendency to generate wasteful bureaucracies and have exceeded the limits of their ability.  

The market works

A major attraction of the free market, on the other hand, is that it works and works well. If consumers and private businesses are left to make buying and selling decisions through a freely operating competitive market, the result is much more likely to approach the biblical ideal of stewardship. The keys to the success of the market are profit, price and competition.

In a competitive market system, only those goods which are wanted--both in quantity and quality--will be produced. Businesses producing unwanted goods will lose money since no one will buy them--at least not at prices sufficient for the enterprise to make a reasonable profit. As they see market prices drop, companies will quickly adjust their output. Similarly, no major shortages will occur over the longer term; increased demand will drive up prices. The increased prices will motivate producers to increase production and attract new producers to the market. As conditions change, the mix of products produced will, thus, adjust to meet demand. Moreover, the goods and services that are produced will, by and large, be produced as efficiently as possible and sold at the lowest possible price. If not, some other company will produce them at a lower cost and put the inefficient producer out of business.  Thus, efficiency is “short-hand for the elimination of waste” and, as such, promotes good stewardship of the world’s resources.[7] When one really stops to think of it, the price system is an amazing thing[8]; we “marvel at the spontaneous ordering that arises in markets—constantly redirection, renewing, and transforming our precious resources from less-valuable to more valuable uses.”[9]
 
Stapleford concluded that “the economically efficient, wealth-generating performance of the Western market exchange economies is nothing short of astounding”.  Per capita production (GDP) in the market exchange countries is more than 5 times the average GDP throughout the world, almost 14 times that in middle-income nations and 73 times the average of the low-income countries[10].In fact, Novak suggested that “of all the systems of political economy which have shaped our history, none has so revolutionized ordinary expectations of human life... as democratic capitalism”[11]-–lengthening the human life span, making elimination of poverty and famine thinkable and enlarging the range of human choice.

Even Marx and Engels, the spiritual fathers of communism, recognized the material advantages of capitalism:

The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together. Subjection of Nature’s forces to man, machinery, application of chemistry to industry and agriculture, steam-navigation, railways, electric telegraphs, clearing of whole continents for cultivation, canalization of rivers, whole populations conjured out of the ground.[12]

Up to the time that Adam Smith, the founder of modern capitalism, wrote his Wealth of Nations, the prevailing economic system was mercantilism–heavy on state control and direction. Famines ravaged the civilized world at least once a generation. Plagues killed thousands. In the 1780's four-fifths of French families devoted 90 percent of their incomes to buying bread–only-bread–to stay alive. In 1793, men in France lived 23.4 years, women 27.3 on average. Novak notes.

The invention of the market economy...more profoundly revolutionized the world between 1800 and the present than any other single force...In Great Britain, real wages doubled between 1800 and 1850, and doubled again between 1850 and 1900. Since the population of Great Britain quadrupled in size, this represented a 1600 percent increase within one century. The gains in liberty of personal choice–in a more varied diet, new beverages, new skills, new vocations–increased accordingly.[13]

The market innovates     

It should not be thought that businesses in a market economy respond merely to currently expressed needs and wants. In order to create a competitive advantage, businesses also continually search out and develop new innovative products which buyers may find attractive. It is this drive to adapt and innovate by entrepreneurs that has created the improvement in our lifestyle compared to that of a century ago–computers, automobiles, modern plumbing etc. In fact, D’Souza argues, entrepreneurs have an “uncanny ability to anticipate and supply what large numbers of people want” and look for solutions to problems that others see as “life’s necessary inconveniences”. He notes, for example, the development of the almost instantaneously successful Walkman (since superseded by the Ipod) by Akio Morito  of  Sony in response to the plague of noisy cumbersome boom boxes[14]. 

 Novak characterizes this innovative spirit as a necessary part of the cultural mandate:

Creation left to itself is incomplete, and humans are called to be co-creators with God, bringing forth the potentialities the Creator has hidden. Creation is full of secrets waiting to be discovered, riddles which human intelligence is expected by the Creator to unlock.[15]

The market, then, provides an effective and powerful incentive to discover the potentialities that lie hidden in God’s creation. Overall then, Christians should prefer the market system—because it works. Of course, as we have seen in the last post, the preference must be conditional; we must recognize that when it does not work adequately, government must step in.

Related Posts

Introduction: Political-Economics as God's Steward

Political-Economics as God's Steward




[1] See John R. Schneider, The Good of Affluence: seeking God in a Culture of Wealth, Eerdmans, 2002, pp189-191
[2] Hernando De Soto, The Mystery of Capital, Basic, New York, 2000,  p.13.
[3] Ed Vanderkloet , In and Around the Workplace, Christian Labour Association of Canada, 1992, p.6.
[4] Andrei Shleifer and Robert Vishny, The Grabbing Hand: Government Pathologies and their Cures, Harvard, Cambridge, 1998, p.109
[5] Op. cit., p.2
[6] . Adam Bennett, “Failed Legacies: Escaping the ghosts of central planning”, Finance and Development, March 2003, p.22.

[7] Ian Harper, Christian Morality and Market Capitalism: Friends or Foes? Acton Lecture 2003, The Centre for Independent Studies, Melbourne, Nov. 19, 2003, p.3.
[8] . I would per­sonally be highly sceptical about identifying in economics speci­fic "laws" or "ordering" that God might have put into creation. If, however, I were to speculate about such order in economics, I would certainly pick the price system as one of the aspects that God has built into this world. A post-script to Appendix F, in my 1999 book, explores this issue further. In any case, we know that, instead of Adam Smith's "invisible hand," it is God that directs all things--also the price mechan­ism.
[9] Victor V. Claar, “What I wish theologians understood about markets and the economists who study them,” Faith and Economics, Fall 2012, p.35.
[10] John E. Stapleford,  Bulls, Bears & Golden Calves: Applying Chrisitan Ethics in Economics, InterVarsity Press, Downers Grove, Illinois, 2002., p.52 (derived from World Bank data).
[11] Michael Novak, The Spirit of Democratic Capitalism, American Enterprise Institute, Simon & Schuster, New York, 1982, p.13.
[12] Karl Marx and Frederick Engels, The Communist Manifesto, New York: International Publishers, 1948, pp. 13-14. See Novak, op. cit.,p. 13.

[13]. Novak, op. cit.,p.17.
[14] Dinesh D’Souza , The Virtue of Prosperity, Free Press, New York, 2000, p.95ff.
[15] Novak, op. cit.,p.39

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