Jay Richards: why should Christians learn about economics?

Here’s a good basic introduction to the free enterprise system by Dr. Jay Richards:

In this lecture, Dr. Richards covers the following topics:

  • the piety myth – thinking that good intentions matter more than good results
  • the greed myth – thinking that capitalism is about greed instead of about innovation and serving others
  • the zero sum game myth – thinking that voluntary exchanges between buyers and sellers result in win-lose outcomes
  • the materialist myth – thinking that there is only a set amount of wealth to be divided by competition

It turns out that the best system for lifting the poor out of poverty – by work or charity – is the economic system that creates wealth through human ingenuity and hard work. That system is the free enterprise system.

Something to read?

If you can’t listen to the lecture and don’t want to buy the whole book “Money, Greed and God?” Then I have a series of posts on each chapter for you.

The index post is here.

Here are the posts in the series:

  • Part 1: The Eight Most Common Myths about Wealth, Poverty, and Free Enterprise
  • Part 2: Can’t We Build A Just Society?
  • Part 3: The Piety Myth
  • Part 4: The Myth of the Zero Sum Game
  • Part 5: Is Wealth Created or Transferred?
  • Part 6: Is Free Enterprise Based on Greed?
  • Part 7: Hasn’t Christianity Always Opposed Free Enterprise?
  • Part 8: Does Free Enterprise Lead to An Ugly Consumerist Culture?
  • Part 9: Will We Use Up All Our Resources?
  • Part 10: Are Markets An Example of Providence?

Parts 4 and 5 are my favorites. It’s so hard to choose one to excerpt, but I must. I will choose… Part 4.

Here’s the problem:

Myth #3: The Zero Sum Game Myth – believing that trade requires a winner and a loser. 

One reason people believe this myth is because they misunderstand how economic value is determined. Economic thinkers with views as diverse as Adam Smith and Karl Marx believed economic value was determined by the labor theory of value. This theory stipulates that the cost to produce an object determines its economic value.

According to this theory, if you build a house that costs you $500,000 to build, that house is worth $500,000. But what if no one can or wants to buy the house? Then what is it worth?

Medieval church scholars put forth a very different theory, one derived from human nature: economic value is in the eye of the beholder. The economic value of an object is determined by how much someone is willing to give up to get that object. This is the subjective theory of value.

And here’s an example of how to avoid the problem:

How you determine economic value affects whether you view free enterprise as a zero-sum game, or a win-win game in which both participants benefit.

Let’s return to the example of the $500,000 house. As the developer of the house, you hire workers to build the house. You then sell it for more than $500,000. According to the labor theory of value, you have taken more than the good is actually worth. You’ve exploited the buyer and your workers by taking this surplus value. You win, they lose.

Yet this situation looks different according to the subjective theory of value. Here, everybody wins. You market and sell the house for more than it cost to produce, but not more than customers will freely pay. The buyer is not forced to pay a cost he doesn’t agree to. You are rewarded for your entrepreneurial effort. Your workers benefit, because you paid them the wages they agreed to when you hired them.

This illustration brings up a couple important points about free enterprise that are often overlooked:

1. Free exchange is a win-win game.

In win-win games, some players may end up better off than others, but everyone ends up better off than they were at the beginning. As the developer, you might make more than your workers. Yet the workers determined they would be better off by freely exchanging their labor for wages, than if they didn’t have the job at all.

A free market doesn’t guarantee that everyone wins in every competition. Rather, it allows many more win-win encounters than any other alternative.

2. The game is win-win because of rules set-up beforehand. 

A free market is not a free-for-all in which everybody can do what they want. Any exchange must be free on both sides. Rule of law, contracts, and property rights are needed to ensure exchanges are conducted rightly. As the developer of the house, you’d be held accountable if you broke your contract and failed to pay workers what you promised.

An exchange that is free on both sides, in which no one is forced or tricked into participating, is a win-win game.

If you do get the book, be sure and skip the chapter on usury. It’s just not as engaging as the others, in my opinion.

3 thoughts on “Jay Richards: why should Christians learn about economics?”

  1. I sometimes mention this story (about a friend):

    So when this friend was 14, his parents encouraged him to “get a job.” He decided he wasn’t too interested in just working at McD’s or having a paper route, and he was into sports cards — so he went up to the local sports card shop, where he was spending some time, and asked if they needed help with anything. They hired him initially to stock shelves.

    He proved that he knew about different things about sports cards (talking about baseball cards or basketball cards): that there were different makers (Topps, Fleer, Upper Deck, and so on) as well as different lines and sets (e.g., premium, super premium/finest, etc.) and was able to advise different customers. He became very valuable so instead of stocking shelves, he was doing sales.

    My friend decided to take some of his wages and bought some packs of premium basketball cards and pulled a 1996 Michael Jordan (remember him? and this was in the second three-peat). My friend already was developing an eye for detail and he could tell this was not only brand new, it was nicely centered and the corners and sides were very nice. Knowing this card was too valuable to play, my friend took it to one of the grading services, got it graded and auctioned off the card for $25,000. (This card today is probably worth somewhere between $50,000-65,000. In comparison, the 1986-87 Fleer Michael Jordan rookie card sold for over $100,000 in 2011.) Not bad for a high school kid.

    Addressing that your zero-sum gain myth:
    – my friend took numerous risks: he used his own money to pull out cards (he’s not guaranteed to pull anything, or even in good shape), plus he had to store the card, get it graded
    – he applied knowledge in numerous instances (buying premium, high quality and low supply packs, having an eye to the card’s condition, knowing about grading)
    – he added value by getting it graded (and he knew the cost structure for grading)

    I guess he could have assumed more risk by holding onto the card and waiting and then auctioning it off.

    Obviously someone was willing to pay $25,000 for the card — and yet if he had held onto it and sold the card at a later time, he would have gotten more.

    There are other things that can influence value.

    For instance, taking your example above: supposing the developer of the house sold it to me for $500,000. I lived in it for several years, and put in $100,000 worth of renovations. Depending on the type of renovations, I’m not going to recoup the full $100,000. This isn’t because someone cheated me out of the difference. There is depreciation. However, there might be factors, even ones out of my control, that increase the home value (desirable location, other developments, inflation) or decrease the home value (foreclosures near me, the town decides to open a dump site near my house, etc.).

    Being on the finance side, it is rather obvious from my POV that it’s not just the cost of labor that should determine (something)’s value i.e., the labor theory of value. I deal with Equity Options a bit — it is a derivative product. It is non-binding, meaning that the holder has the ability to exercise (or not to exercise) the option.

    For instance, for a small price, I could grant you the ability to buy (or to sell) a share of AMZN stock a month from now (say “January 12th, 2018”).

    If you thought that AMZN was going to go up, but you needed a way to hedge against the price increase, you could purchase a Call option to lock in a price. For instance, you were looking to buy AMZN at the best price, you would purchase the Call option at 1175 and AMZN goes up, you exercise the Call option.

    Obviously the option is not going to free, so how much should you pay for such an option?

    There are some other questions one could ask. Say you were looking for a lower price, say 1170.00 instead of 1175. Since this is a lower price (i.e., better for the buyer), you should pay a bit more.

    Or let’s say I waited a day — tomorrow — to see whether AMZN went up or down. I should pay a bit less for the same option tomorrow than I would today, because there’s less time risk.

    So it turns out the going price for the 12-Jan-18 1175.00 contract is about 25.20 at the present time.

    There is value in liquidity.
    There is value due to the time value of money or to account for time risk.
    There is value for better pricing.

    Granted, on the flip side, there are also ways to artificially inflate something’s value (or artificially keep a price high) — like diamonds — in terms of slowly releasing a large supply or making it highly sought after. Of course Christians can conscientiously decide not to purchase blood diamonds and influence justice in this manner.

    Like

  2. I’ve read the book a few times; it’s quite good. I recommend the chapter on the just society. The classroom free trade experiment is invaluable.

    Liked by 1 person

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