Wednesday 3 December 2014

Choice of Economic Systems: A Conditional Preference for the Market—what does that mean?



In my introductory post on this blog, I stated my conclusion that Christians should have a preference for the free market. However, this preference should be conditional. A reader of the postings so far, has commented that “your view of the 'free market' is no longer anywhere close to what a free market should be”. This comment suggests that my postings so far have not been totally clear on what I mean by a conditional preference for the market. “Let me make this perfectly clear.” I do not favour an unrestricted free market. I make no claim that the free market is the Christian alternative.  In this posting I will expand on that issue.
 

Economic Systems

I would define economics as “the study of allocating our God-given resources in a way that glorifies God and promotes abundant life for all persons and of all creation”. That is, we need to decide how our God-given resources are to be used and divided up so that all people will be able to exercise their mandate to glorify God. That decision hinges on the answers to what economists have labelled the Five Fundamental Questions:
             
  1. What products and services are to be produced and how much of each?
  2. How are those products and services to be produced–i.e. by who, using what resources and what methods? 
  3. Who will receive the goods and services that are produced?  
  4. How will the economic system adapt to change? 
  5. Who owns the capital resources, the land (including the products growing thereon and those buried in it) and the means of production (factories etc.)?
There are, basically, two alternative means to decide these questions. Either they can be decided by the market or they can be decided by the government. If they are all decided by the market, we have a pure free market or capitalistic economic system. If they are all decided by the government, the state, then we have a command economy– a communist/socialist economic system. 

It should be noted that the “market,” as used here, is not some huge, impersonal force or institution which directs the world economy. It is simply millions upon millions (world-wide, billions upon billions) of individual decision makers engaged in voluntary exchanges of material goods and services. In a competitive market system, individuals and companies will choose which goods and services they will produce based on the profit motive. They will produce only those goods and services that other individuals and companies are willing to buy. If they fail to produce these wanted goods, some other company will produce them. They will also produce them as efficiently as possible in order to be able to sell them at a profit. If they do not, some other company will. Those who cannot meet the market price will lose money and go out of business if they do not quickly adapt. The producers will freely choose (by bidding against competitors) to employ not only those physical resources they need but also the needed employees who freely offer their services in exchange for agreed on remuneration. Individual buyers and sellers will own all the resources and make all the decisions to answer the Fundamental Questions. In a command economy, on the other hand, the government owns all the land and capital. State employees--civil servants--will decide how to use the land, what factories to build, what goods to produce and who will get them. 
              
In reality, of course, there is no such thing as a totally free market. Virtually every country in the world uses a combination of these two systems, i.e. a Mixed Economic System in which some of the fundamental questions are made by the market and some by the government. Countries can be ranked on a continuum based on the degree to which the government makes some of these decisions or to what extent they are left to the market as roughly[1] illustrated below:

Free Market <------------------------------------------------------------->Command Economy
    U.S., Canada, U.K., Germany, Netherlands, France , Russia, China,  Cuba, North Korea

Over time, countries have, through political processes (or lack thereof), arrived at the current degree of government involvement in their economy. However, that involvement is continually changing. Currently, for example, debate rages in Canada as to whether health care should be provided exclusively by government instead of, for example, also by privately owned clinics. On the other hand, in the U.S. the focus is on the other side of the coin: “to what extent should the government supplement the private health care system?”  Another controversial question is whether government should move to provide national day care system. As Christians, we too are faced with that debate. Should we favour more or less government involvement? Does the Bible have anything to teach us about that?     
                 

A Preference for the Market                                      

              
Although the Bible teaches that government has been instituted by God and must be obeyed, the Scriptures do not provide us with rules that set out the degree of government involvement that is appropriate.[2] Certainly, the Bible does not reject the market economy out of hand nor does either forbid or mandate ownership of private property. Indeed, as Noell has observed, “ there are several examples of parables in which Jesus speaks of the pursuit of economic gain as an expected phenomenon and employs market-style reasoning” with the goal of increasing profits e.g Matthew 13:44,45.[3] We cannot, therefore, flatly reject the market; instead, we need to determine the degree of government/market involvement on an issue by issue basis. 

However, I believe that the Bible does lead us to prefer the free market”[4] and private ownership and enterprise because it is the economic system that best achieves biblically derived economic goals. In future posts, I hope to develop that thesis by showing that the market and private property encourage good stewardship, have significant advantages in assisting the weak, allow maximum scope for personal responsibility, and in other ways are conducive to a Christian lifestyle. 

 

But our preference is conditional


The market, however, is far from perfect. Rather, it is subject to various "failures." Consequently, our support for the market cannot be unconditional. When the market is inadequate, government will need to intervene. The extent of such intervention is, however, a matter of debate which will also be a continuing issue on this blog. For now, this section will provide a quick introduction to some important market failures.

A justice system is required to provide the underlying framework of laws and regulations for the economy and "restrain the licentiousness of men." Without such a framework and the means to ensure compliance, the strong would merely take from the weak; there would be no market exchanges. In particularly, property rights must be defined, recorded and protected. Moreover, the market only works when buyers and sellers have equal information. Consumers may, therefore, require government protection. Such protection will also be necessary when there is inadequate competition in the market.

It is, furthermore, obvious that those who have no money cannot participate in the market. Given the Biblical mandate to help the poor, action of some type is required to assist those who are economically marginalized. Moreover, business cycles are a fact of economic life; free market economies fluctuate between prosperity and recession/depression—between inflation and unemployment.

Another well-recognized market failure is caused by what are referred to as externalities, spillovers or "neighbourhood effects"--situations when "third parties," those not involved in the market transaction, bear costs of or receive benefits from the transaction. By definition, these costs and/or benefits are not reflected in the market price of the goods or services and do not enter into the decisions related to whether to produce or consume the product. For example, the decision to drive a car will involve pollution of the air which affects people in a wide area, noise burden for those living beside the road (with consequent lower property values), increased traffic problems (with increased travel time for all drivers), deterioration of road surfaces and increased danger for other drivers and pedestrians. The market participants, the person buying and driving the car and the automobile producer selling it, are not forced to consider these costs since they do not have to pay them. Consequently, the “market”, as such, is unaware of these “bad” neighbourhood effects and will not do anything about them.

Other bad neighbourhood effects include air, water and noise pollution created by factories, the noise problem created by low-flying aircraft, the suffering of those who lose their jobs due to company "down-sizing" (and those who suffer through the "multiplier effect” as this action ripples through the economy) and even the victims of a car accident caused by a individual's "free choice" to drive after drinking excessively. Obviously, if the market is left uncontrolled, serious injustice may be visited on innocent neighbours and God’s creation.

Finally, I note that the free market by itself will not supply (what society considers to be} adequate amounts of various necessary goods and services e.g. defense, police, schools, roads, etc. Moreover, unrestricted markets have no concern for non-economic goals such as maintaining strong families, treating employees fairly etc. , and would produce goods and services which the Bible considers unacceptable e.g abortions, prostitution, pornography.

 

Government Intervention 

Given our preference for the market but recognizing the need for government action to deal with market failures, we must ask questions such as the following about each current or potential economic activity:



1. Does/could the market (private enterprise) perform this task adequately?
-Are God's laws being obeyed?
-Is justice being achieved?
-Are the weak adequately protected?
-Is the earth sufficiently being developed to allow mankind to honour God?
-Are we being good stewards with God's earth?
2. If not, does/could government action improve the situation?
-What are the benefits and costs of the suggested action?



As part of this last question, it is necessary to consider alternative ways in which government can act. Should it take action itself or merely assist/regulate the market to achieve the desired effect? A preference for the market means the latter. For instance, providing money (tax credits, vouchers) to those inadequately housed is preferred to public housing. Providing vouchers to parents/students for education so that they can choose their own schools (and allow profit or non-profit organizations to compete to fulfil their needs) is preferred to government operated schools. Public, private partnerships to build and operate infrastructure is preferred to government ownerships and operations. 
 
Moreover, tax policy should be used to make polluters/users pay the true cost of the goods they consume. Negative neighbourhood effects, e.g., pollution, need to be charged for by carbon tax or user fees. If the price of the products includes these costs (i.e. externalities are internalized), people will use less. As Andrew Coyne has recently asked:
 Why do we waste water? Because we give it away free, or at a price well below its marginal cost. Why are roads so clogged with traffic? Because we don’t charge people to use them. Why do we pollute the air? Because the costs of pollution, instead of being built into the prices of things we produce or consume,...are sloughed off on society at large.[1]

Let’s tax the things we want to discourage!



[1] Andrew Coyne, “Green day: Why we should tax the things we want to discourage, not the thing we want to encourage”, National Post Magazine, Dec. 2014, p.17.


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[1]The ranking is illustrative only; readers will no doubt have their own intuitive ranking. See, e.g. V. Victor Claar, & Robin J. Klay, Economics in Christian Perspective: Theory, Policy and Life Choices, IVP Academic, Downers Grove Illinois, 2007.
[2] In John M. Boersema, Political-Economic Activity to the Honour of God: the Foundation. Premier Publishing, Winnipeg, 1999, I have explored this in more detail. See e.g. p.150 re the “public” “private” split.
[3] Edd S. Noell,. “Delight, Danger, and Duty: The Good of Affluence and Current Research on Wealth in the Gospels”, Faith & Economics, Fall 2002, p. 19 who also notes, p.17,  that “there is strong reason to believe that the Roman provinces in the eastern Mediterranean region, including Palestine, were increasingly reliant on market-based allocation in the first century”.
[4] I stress that I am concerned only with the degree of government involvement in the economy as related to the Five Fundamental Questions–not with capitalism or socialism as such. As Koyzis, p.55, has argued, capitalism may be seen as the economic side of liberalism. It “carries much emotional baggage and seems rarely to be used in a simple descriptive manner”.  Expressing a preference for the free market is not intended to imply support for liberalism with its belief in the sovereignty of man. Rather, I fully recognize not only God’s sovereignty but also that “the authorities that exist have been established by God” and, therefore, “everyone must submit himself to the governing authorities” (Rom 13:1).
[5] Andrew Coyne, “Green day: Why we should tax the things we want to discourage, not the thing we want to encourage”, National Post Magazine, Dec. 2014, p.17.

1 comment:

Politcal-Economics as God's Steward said...

As usual, your comments are invited. You can also comment privately tojohnboersema@rogers.com