Jay Richards: eight common myths about wealth, poverty and the free market

I have a key that will unlock a puzzling mystery
I have a key that will unlock a puzzling mystery

Have you read Jay Richards’ book “Money, Greed and God?” Because if you haven’t, he’s written a series of articles that summarize the main points of the book.

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.

On this view, what you really need to fear as a consumer is government intervention that restricts your choices in the marketplace, or makes some choices more expensive than they need to be (tariffs).

If you care about poverty, it’s often tempting to think that it can only be solved one way – by transferring wealth from the rich to the poor. But that is a very mistaken view, as any economist will tell you. The right way to create prosperity is by creating laws and policies that unleash individual creativity. Letting individuals create innovative products and services, letting them keep what they earn, making sure that the law doesn’t punish entrepreneurs – that incentivizes wealth creation. Fixing poverty does not mean transferring wealth, it means giving people more freedom to create wealth on their own. Free trade between nations is an important way that we encourage people to create better products and services that what they have available in their own countries.

Economists agree on the benefits of free trade

Who could possibly disagree with free trade? Well, many people on the left do. But economists across the spectrum of ideology (university and private sector and public sector) agree on the benefits of free trade.

Harvard economist Greg Mankiw explains what most professional economists agree on.

Excerpt:

Here is the list, together with the percentage of economists who agree:

  1. A ceiling on rents reduces the quantity and quality of housing available. (93%)
  2. Tariffs and import quotas usually reduce general economic welfare. (93%)
  3. Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)
  4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)
  5. The United States should not restrict employers from outsourcing work to foreign countries. (90%)
  6. The United States should eliminate agricultural subsidies. (85%)
  7. Local and state governments should eliminate subsidies to professional sports franchises. (85%)
  8. If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85%)
  9. The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85%)
  10. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%)
  11. A large federal budget deficit has an adverse effect on the economy. (83%)
  12. A minimum wage increases unemployment among young and unskilled workers. (79%)
  13. The government should restructure the welfare system along the lines of a “negative income tax.” (79%)
  14. Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78%)

Socialist economic policies don’t work because they are making policies that are based on economic myths. We know that these myths are myths because of economics is a mathematical science, and because we have tried good and bad policies in different times and places. We have calculations and we have experience to know what works and what doesn’t work. If you want to help the poor, you have to respect what economists know about how wealth is created. The solution is not to “spread the wealth around”, it’s to encourage people to create more wealth by inventing things that people freely choose to buy.

13 thoughts on “Jay Richards: eight common myths about wealth, poverty and the free market”

    1. What do you mean by “social safety nets”? Who would fund such nets and what would a person have to do to qualify for them? This is the problem with any form of welfare. It boils down to the government holding guns to people’s heads, taking their money, and giving it to people who did not earn it.
      Voluntary charity is one thing. Forced redistribution of wealth is just a fancy term for theft.

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        1. Right. That’s the leftist view. You think that a secular government should confiscate wealth from religious people to spend on buying votes in the next election. So in the UK health care means breast implants, and in Canada health care means sex changes and abortions. You’re a leftist who believes that Christians should have their money spent for them on favors for non Christians that are not mentioned in the Constitution.

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          1. I’m not a “leftist”. I’m a moderate; I’m agnostic on a lot of political issues. I just haven’t figured out a lot of these things. I didn’t say that government should take wealth from religious people (Churches?).

            If i was in favor of single-payer, I certainly wouldn’t be in favor of breast implants. sex changes, and abortions.

            I said that I don’t see how taxes are necessarily theft. I didn’t say “re-distribution”, which is a tax but not all taxes. I can understand why people would be against income taxes.

            I think we have moral obligation to help people, but I didn’t say legal obligation.

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          2. You have a moral obligation to give charity to those in need. You don’t have a right to give OTHER PEOPLE’S MONEY to other people through government. That’s theft. When you vote for big government, you cannot complain when government seizes children from Christian parents, or when government sues Christian businesses. That’s why we shouldn’t give government money for things other that their constitutional responsibilities.

            Liked by 1 person

        2. If I dislike a specific church or groups like that I can willingly not pay any money to them. So that is a big difference no force is made to do that.

          But at the same time gov’t agencies are always far more expensive to run than a religious based charity. High everhead, management costs makes sure that only pennies on the dollar collected will ever reach those in need. And it is hard to reach that funding since there will be so much red tape many in need won’t qualify. Whereas a religious approach will often have real people that can be contacted on a case by case basis to try and prevent so many people from falling through the cracks.

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        3. Allow me to give you an example that helps show how taxes are theft. Imagine that a local car dealership one day drove into your neighborhood with a fleet of brand new sports cars. They parked one in every driveway and then started knocking on people’s doors. When you open your door, the dealer tells you. “We’re providing these cars to every member of the community as a public service. Now we just need to collect 30% of your annual income from you to pay for it.”

          When you explain to the dealer that you don’t want the car, he says, “By choosing to live here you’ve implicitly agreed to paying for this service. You don’t have to use the car, but if you’re going to live here, you do have to pay for it. You can move out of the country if you wish, but if you don’t pay for this car, we’ll have to send you to jail for not abiding by the social contract.”

          Would anyone accept this sort of practice as legitimate? Of course not. In any other case if a person was forced to pay for a service they did not want or agree with, it would be called theft. Yet the government does precisely this and it is simply called taxes.

          Now, it’s one thing when taxes are used for services like the police and fire department (although I do believe these services could easily be funded privately in lieu of taxes) as these are services that are provided to everyone. However, welfare is a service that takes from some and gives to others where the people providing the money have no say in the matter and receive no service in return.

          If there is a moral obligation to give money to the needy, that obligation rests on the rightful owner of the money. Imagine if a person held a gun to his neighbors head, took half the neighbor’s money, and gave it to the poor, all the while keeping his own money to spend on himself. Who would consider this to be moral?

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  1. Many economic problems are made by government. Utility and all tax rates eat up more of an income than they used to.

    In Canada for example I think the minimum income before you pay taxes should be higher. That way more people thst make less benefit by no losing money in taxes.

    The left solution is take 500 more from everyone and make a big deal about the new 200 per person you are giving out as if everyone is better off

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    1. The government always takes a cut for themselves when they collect taxes. They don’t have real jobs where they earn money by providing services and goods that consumers in a free market freely choose.

      Liked by 1 person

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