Tag Archives: Economics

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.

How did Obama’s plan to let government run student loans work out?

Obama nationalized student loan administration in 2010
Obama nationalized student loan administration in 2010

I’m a free-market capitalist, so I believe that economic decision-making is best done by the people it concerns, not the people in government. If it is a decision that affects the family, let the family decide. If it’s a decision that affects the business, let the business owner decide. Obama has a different view – he thinks that government should make all of the decisions, even though government earns none of the money.

Here is an article in Investor’s Business Daily about his policy of letting the government take over student loan decision-making.

Excerpt:

A report from the Department of Education notes that the net cost of the federal government’s direct loan program is quickly heading into the red. This program, mind you, was supposed to be a moneymaker for the government, as students paid back federal loans with interest.

But as it turns out, borrowers have been flocking toward various loan forgiveness programs, by which the government will lose money, erasing gains from other loans. The report shows that the direct loan program went from a $25 billion surplus in 2012 to less than $5 billion by 2015.

A separate report says that this program ran a $36 billion deficit last year, up from $8.4 billion in 2016.

This is not how this federal loan program was supposed to work when President Obama launched it eight years ago.

In 2010, President Obama effectively nationalized student lending by cutting banks — which had been offering government-backed loans to students — out of the equation and having the government make the loans itself.

“By cutting out the middleman, we’ll save the American taxpayers $68 billion in the coming years,” Obama said when he signed this change into law. “That’s real money.”

As a result, federal student loan debt shot up from $154.9 billion in 2009 to $1.1 trillion by the end of 2017.

As everyone knows, under Obama’s big government leadership, the national debt skyrocketed from $10 trillion to $20 trillion in only 8 years. Obama ran up as much debt in his 8 years as ALL the other presidents, combined. Why? It’s simple. Because government isn’t as careful with other people’s money as people are careful with their own money. People make better decisions than government because they care about the money more – they earned it. The right people to solve an economic problem are the people in the families, and the people at the local bank branches nearby. When government takes over economic decision-making, they use other people’s money to buy the votes of people who make poor decisions.

We shouldn’t be allowing students to take 4-year vacations at taxpayer expense, so that they can learn English or Women’s Studies and then stick taxpayers with the bill. Some of those taxpayers had to study hard things like engineering and pay their own way. Some of those taxpayers had to get jobs in the trades as electricians and plumbers to pay for the bad decisions of these spoiled brats. Student loan administration should not be something for big government to control. When government decides who gets loans, students feel no pressure to study subjects and get credentials that will allow them to pay back what they borrowed. I want the banks to make the lending decisions and loan out their own money, so that they can deny people who are studying nonsense that won’t get a return.

That’s why we should never have elected a big-government liberal to be president. They make a lot of promises about how great they are with money, but it never works out. Big government is never the answer to problems that are outside of what the Constitution describes as the boundaries of government.

(Image Source)

Making a difference as a Christian doesn’t mean doing dramatic, reckless things

Ratio Christi event at Ohio State University featuring Frank Turek
Ratio Christi event at Ohio State University featuring Frank Turek (10/12/2015)

What’s the ideal balance between work and missions? In this post, I will argue against going abroad to do full-time missions.

Do apologetics ministry in your spare time, and work full-time

A full-time job and part-time ministry makes the most sense from a cost-benefit point of view. I have friends who are software engineers who studied enough science, history, and philosophy part-time, who are able to do public debates with atheists, which influence many more people than one-on-one interactions. One of my friends has several Masters degrees, and is in a PhD program, but his full-time career is in software and network management. He is 100% self-funded. He has worked in a successful apologetics career with a full-time career in technology, and he is debt-free. This is the best option . Your debts get paid off. Your resume stays gap-free. You bring a nest egg to your future spouse. You can afford to have children. You can afford a stay-at-home mom. You can afford either homeschooling or private schools, should you decide to go that route.

You have to start saving and investing early if you want to be independent in your old age. With full-time work and part-time ministry, you still make a difference for Christ and His Kingdom over time, while avoiding a financial crisis that could cost you your family, your friends, and even your faith. This is an especially wise way to proceed, given the economic struggles we are likely to face from housing bubbles, student loan bubbles, rising interest rates, entitlement crises, state pension underfunding, environmental regulations, the ever increasing national debt, demographic crisis, etc. Read the culture and be cautious about the future.

Use the Internet to make a difference in other countries for free

One cost-effective way to make a difference is by using the Internet to reach other countries. You can work full-time, and then use your spare time to blog. This blog gets an average of 24,000 page views per week. About 45% of that traffic comes from NON-USA countries. If you keep working full-time and just start a blog for free, then you can maintain your gap-free resume and have a much easier time marrying and raising children.

The university next door is a great place to have an influence

I do think full-time ministry is OK in two cases: if you don’t go abroad, or if you go abroad with a full-time job or full-ride scholarship. My friend Eric Chabot was able to host Frank Turek at Ohio State University last night (see photo above), for example. He got a great crowd. He is donation-driven, but he runs a lean operation since he lives near the campus where he serves. When it comes to having an impact, the American university is the place to make a difference. We have enough trouble in our own country, especially in the universities, where so many young people lose the faith of their childhood – there’s no need to travel and incur heavy expenses.  I think it also makes sense financially to go abroad for missions, if you get a scholarship that pays your way or if you have a job offer where you can work full-time and do missions part-time. What does not make sense is sending an unskilled missionary to a foreign country at the cost of tens of thousands of dollars that could be used much more efficiently in smaller, effective Eric-Chabot-style operations.

Your feelings and desires are not God speaking to you

Now some people who want to go into overseas missions will tell me that they feel led to go. This method of decision making is not Biblical, as I explained in one of my previous posts. If you believe the Bible, then feelings are a pretty poor way of determining what God wants from you. In fact, left to themselves, humans typically choose what feels best for them, not what does best for God. If God really calls you to do something, like he called Jonah, then you probably won’t feel like doing it. Missionary work is especially suspect when God is supposedly calling you to go to a country that you always dreamed of traveling to while you were a non-Christian. Normally, conversion causes you to have different desires – not the same desires you had as a non-Christian. Unless you hear an audible voice, like an Old Testament prophet would, then it’s best not to think that God is speaking through your feelings and desires. A good book to read on this is “Decision Making and the Will of God“, by Garry Friesen.

Don’t go into missions in order to have fun or go on an adventure

I am suspicious of people who try to turn Christianity into a mechanism for achieving the same goals that non-Christians want to achieve. These days, it seems as if everyone wants to travel to exotic places. If there is evidence of hedonistic, fun-pursuing, thrill-seeking behavior in your past, then consider that you may just want an “adventure”. I have a friend who went to Russia for a year just after graduating college, and she admitted to me that she just went “to have an adventure”. To me, that’s not a good reason to spend thousands of dollars, and put gaps in your resume. It’s not a cost-effective way to make a difference, given the other alternatives. Your goal should be to make yourself defensible so that you can put out a sustained effort that lasts, not burn out and then be ineffective for the rest of your life. Think about what J. Warner Wallace says about living wisely and prudently so you position yourself to make a steady contribution in the second half of your life. Don’t wreck your long-term impact for short-term fun. God will not honor that.

Don’t go into missions to make up for an immoral past

Anyway, if you look in your past and see lots of wild behavior – drinking, drugs, premarital sex, cohabitation, abortions, gambling, divorces, etc., then consider that you may be interested in missions for the wrong reasons. You don’t need to go on a missions trip to dramatically declare to everyone that you are now completely reformed from your wild party days. I actually managed to talk a friend out of a short-term missions trip who felt that it was a good way to do something meaningful to “make up” for her past. By being responsible with her job and saving money, she’s managed to avoid burning out, and to instead put out a steady stream of effective activities. And she was financially stable enough to get married and have children, as well – another excellent way to make a difference.

Do not go into missions if your resume and balance sheet do not demonstrate maturity

We already talked about the need for sound planning in the Bible study we did with Wayne Grudem.  The Bible praises hard work, stewardship, prudence and wisdom. And this is especially true for people who are getting older and need to be thinking about marriage, children and retirement. It’s not a good witness for Christians to be financially unstable. When you are able to stand on your own two feet financially, and help others from your earnings, you gain credibility with non-Christians. We don’t want people to think that we are doing this for the money. The best option is to be self-funded, like Paul and his tent-making-funded ministry.

By the way, if you’d like to read a related post by Eric Chabot, this one is a good one.

How much does the average American corporation make in profit?

How much profit does the average American corporation make?
How much profit does the average American corporation make?

A while back, there was a story about how Americans vastly overestimate how many people in the USA are homosexual. According to Gallup polls in 2011, Americans estimated that 25% of the people in America were homosexual. In 2015, it was 23%. The actual number is about 3%. So it’s very clear that Americans can have wildly inaccurate perceptions about reality. Why are Americans so wrong? I think it’s because they see a lot of gay people in high profile areas, particularly in the entertainment industry.

I thought about this failure to perceive reality when I saw a story about how much profit Americans think that corporations make. My guess was that the average corporation makes about 5-10% profit margin. I know this because I used to buy and sell stocks regularly and that’s one of the numbers I would look at. Most Americans own stocks, so I thought they most Americans would know the number as well. But it turns out that American perceptions of corporate profits are wildly off the mark.

Check out this article from the prestigious American Enterprise Institute:

When a random sample of American adults were asked the question “Just a rough guess, what percent profit on each dollar of sales do you think the average company makes after taxes?” for the Reason-Rupe poll in May 2013, the average response was 36%! That response was very close to historical results from the polling organization ORC International polls for a slightly different, but related question: What percent profit on each dollar of sales do you think the average manufacturer makes after taxes? Responses to that question in 9 different polls between 1971 and 1987 ranged from 28% to 37% and averaged 31.6%.

How do the public’s estimates of corporate profit margins compare to reality? Not surprisingly they are off by a huge margin. According to this NYU Stern database for more than 7,000 US companies (updated in January 2018) in many different industries, the average profit margin is 7.9% for all companies and 6.9% for more than 6,000 companies excluding financials (see chart above).

[…]“Big Oil” companies make a lot of profits, right? Well, that industry (Integrated Oil/Gas) had a below-average profit margin of 5.6% in the most recent period analyzed, and separately, the Production and Exploration Oil/Gas industry is losing money, reflected in a -6.6% profit margin. For the general retail sector, the average profit margin is only 2.3% and for the grocery and food retail industry, it’s even lower at only 1.6%. And evil Walmart only made a 2.1% profit margin in 2017 (first three quarters) which is less than the industry average for general retail, possibly because grocery sales now make up more than half of Walmart’s revenue and profit margins are lower on food than general retail.

Sometimes, the government makes MORE from the sale of goods or services than the company that does ALL the work:

Interestingly, Walmart’s profit margin of 2.1% is actually less than one-third of the 6.5% the average state/local government takes of each dollar of Walmart’s retail sales for sales taxes. Think about it – for every $100 in sales for Walmart, the state/local governments get an average of $6.50 in sales taxes (and as much as $10.12 in Louisiana and $9.45 in Tennessee, see data here), while Walmart gets only $2.10 in after-tax profits!

I think that Americans are getting their false anti-corporation views from listening to the mainstream media. The mainstream media is overwhelmingly leftist according to recent studies of their political donations. I think that the anti-corporate views of the average American comes from their uncritical consumption of mainstream media propaganda. They think they are getting objective news reporting, but what they’re really getting is socialist propaganda.

Here is a short little video that explains more about profit margins, and what would happen if a socialist like Bernie Sanders were put in charge of a corporation:

If you’d like to help with this problem of anti-business economic illiteracy, please watch the video and share it, or share the AEI article, which contains the video. America will be a better country when Americans have accurate, informed beliefs about important issues.

How well is socialized health care working in Britain?

The National Health Service is government-run socialist health care
The National Health Service is government-run socialist health care

Back in 2009, a radical leftist named Paul Krugman wrote about the health care system in Britain. As a leftist, it’s his view that government-run health care is better than free market health care. Basically, he thinks that people get better health care if it’s run like the US Postal Service is run, instead of how Amazon.com is run.

Let’s see what he says in the far-left extremist New York Times:

In Britain, the government itself runs the hospitals and employs the doctors. We’ve all heard scare stories about how that works in practice; these stories are false. Like every system, the National Health Service has problems, but over all it appears to provide quite good care while spending only about 40 percent as much per person as we do. By the way, our own Veterans Health Administration, which is run somewhat like the British health service, also manages to combine quality care with low costs.

And what about the people who say that the NHS doesn’t provide quality health care, despite getting a huge portion of the all the taxes that are collected in Britain?

At this point, all that stands in the way of universal health care in America are the greed of the medical-industrial complex, the lies of the right-wing propaganda machine, and the gullibility of voters who believe those lies.

Every bad story that you’ve ever heard about socialized health care is a lie, and you’re gullible if you believe those lies.

Well, see, now I’m confused. Because if I turn the page of the New York Times from an editorial to a news story, I read this:

At some emergency wards, patients wait more than 12 hours before they are tended to. Corridors are jammed with beds carrying frail and elderly patients waiting to be admitted to hospital wards. Outpatient appointments were canceled to free up staff members, and by Wednesday morning hospitals had been ordered to postpone nonurgent surgeries until the end of the month.

Cuts to the National Health Service budget in Britain have left hospitals stretched over the winter for years, but this time a flu outbreak, colder weather and high levels of respiratory illnesses have put the N.H.S. under the highest strain in decades.

The situation has become so dire that the head of the health service is warning that the system is overwhelmed.

[…]“The N.H.S. waiting list will grow to five million people by 2021,” Mr. Stevens said in an impassioned speech to health care leaders in November. “That is one million more people, equivalent to one in 10 of us, the highest number ever.”

Over the past week, hospitals have increasingly declared “black alerts,” an admission that they are unable to cope with demand, the health service confirmed, without releasing numbers. Most hospitals have been unable to meet emergency-ward targets of seeing patients within four hours because of a shortage of beds and staff.

Britain spends billions and billions of pounds on health care every year, but it’s never enough. And British citizens already pay far more in taxes than Americans, who get much better care.

Sometimes, statistics are not as good as a good horror story…  On this blog, I’ve written about dozens of NHS horror stories. But Paul Krugman says they are all lies, including this one from the same New York Times article:

“There’s no real system or order; it’s a jungle in here,” said Nancy Harper, who had accompanied her 87-year-old grandmother, who was lying down and complaining of excruciating pain in her lower back.

“It’s been more than five hours,” Ms. Harper said. “We get to the front of the queue and then someone more ill comes in and we get pushed back. It’s outrageous.”

The UK Telegraph had some more information about the NHS health care system:

Every hospital in the country has been ordered to cancel all non-urgent surgery until at least February in an unprecedented step by NHS officials.

The instructions on Tuesday night – which will see result in around 50,000 operations being axed – followed claims by senior doctors that patients were being treated in “third world” conditions, as hospital chief executives warned of the worst winter crisis for three decades.

[…]Trusts have also been told they can abandon efforts to house male and female patients in separate wards, in an effort to protect basic safety, as services become overwhelmed.

50,000 scheduled surgeries canceled. If this were private sector health care, then the patients would have some recourse. But when the government is running health care, good luck trying to sue them for pain and suffering. They’ve already got your money from taxes, too – you can’t get it out to go somewhere else for surgery.

Although this seems horrifying to Americans, this is pretty standard all year round for Canadians, who have a true single payer health care system. According to the Fraser Institute, the average Canadian family pays about $12,000 in taxes for their free health care. And when they need things like MRIs or knee replacements, they have to wait for months. The average wait time there for “medically necessary treatment” is 21.2 weeks. Medically  Necessary Treatment. When I ask for an MRI in America, I get in the same week that I call.

When conservatives like me oppose government-run health care, it’s because we have looked carefully at government-run health care as it exists in comparable countries, and we have decided that it does not work. Progressives need to take a look at reality in countries like Britain and Canada. How well does it work? How much does it cost? It’s no good making policy decisions with feelings instead of facts.