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.


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.

Should Christians be committed to small government conservatism?

A conflict of worldviews
A conflict of worldviews

I found a paper (PDF) on the University of Washington web site that makes the case for why Christians ought to care about more than just social issues.

Here’s the abstract:

What accounts for cross-national variation in religiosity as measured by church attendance and non-religious rates? Examining answers from both secularization theory and the religious economy perspective, we assert that cross-national variation in religious participation is a function of government welfare spending and provide a theory that links macro-sociological outcomes with individual rationality. Churches historically have provided social welfare. As governments gradually assume many of these welfare functions, individuals with elastic preferences for spiritual goods will reduce their level of participation since the desired welfare goods can be obtained from secular sources. Cross-national data on welfare spending and religious participation show a strong negative relationship between these two variables after controlling for other aspects of modernization.

Here’s the conclusion:

It is quite apparent that there is a strong statistical relationship between state social welfare spending and religious participation and religiosity. Countries with higher levels of per capita welfare have a proclivity for less religious participation and tend to have higher percentages of non-religious individuals. People living in countries with high social welfare spending per capita even have less of a tendency to take comfort in religion, perhaps knowing that the state is there to help them in times of crisis.34 As laid out in the theory above, there is likely a substitution effect for some individuals between state-provided services and religious services. Religion will still be there to serve the spiritual needs of people seeking answers to the philosophic mysteries of life, but those who value those spiritual goods less than the tangible welfare benefits churches provide will be less likely to participate in religious services once secular substitutes become available. Given that religious practice and values are often passed down from generation to generation, the weakening of practice in one generation will likely translate into weaker practice in subsequent generations. Does this mean that secularization theory is correct in its prediction that religion will gradually fade away? Doubtful. Realizing that there is still a yearning among many people to understand the mysteries of life, religion is not likely to dissipate at any time soon. Government simply cannot offer credible substitutes for these less tangible, supernatural goods. The explosion in spirituality once religion was made legal in former Soviet bloc countries lends credence to this assertion (Greeley 1994). As religious markets become more deregulated in various parts of the world, it is likely that new religious movements will take advantage of increased liberty and discover ways to expand.

Perhaps one of the most important lessons from the findings above is that the religiosity of a society is not simply determined by sociological factors. Government policy can play an important role in shaping the religiosity of a nation. Policies aimed at regulating the activities of religious organizations — from tax laws to zoning regulations — have important effects on the firms that supply religious goods and services. Many of these policies are designed consciously to promote or inhibit religious practice. Alternatively, welfare policy has been shown here to unintentionally affect the demand for religious services, likely over the course of generations. And, finally, since an extensive welfare state is considered by many to be a hallmark of modernized societies, the microfoundational analysis presented above provides a way of incorporating a component part of the secularization thesis (which relies heavily on notions of modernization) into the religious economy perspective.

Have you ever heard a sermon that addresses the size of government and individual liberty and prosperity? I haven’t. You’d have to be reading Wayne Grudem or Jay Richards to find that. The typical church you attend either praises big government or says nothing about it. After all, we can keep making withdrawals on the liberties we have right now without ever worrying about having to make any deposits, right? Everything will be fine, and it’s easier not to have to think about what’s down the road to serfdom, so long as the scenery is nice for us right now. Religion is primarily about comfort, not truth. Right?

The funny thing is that when I talk to most Christians about this, especially non-Americans, they simply don’t have the knowledge of economics to understand how big government affects liberty, prosperity and security. There is no one reading F.A. Hayek and Thomas Sowell in Europe, and there are not that many people reading them here at home either.

America’s abandonment of traditional values has hurt the black community

Economist Walter Williams
Economist Walter Williams

My two favorite economists are Thomas Sowell and Walter Williams, who are coincidentally both black. Both have been around long enough to see how the Great Society welfare programs and the Sexual Revolution have affected blacks.

Here is Walter Williams commenting on the black community in The Daily Signal.

He writes:

How might one explain the greater civility of Philadelphia and other big-city, predominantly black neighborhoods and schools during earlier periods compared with today? Would anyone argue that during the ’40s and ’50s, there was less racial discrimination and poverty? Was academic performance higher because there were greater opportunities? Was civility in school greater in earlier periods because black students had more black role models in the form of black principals, teachers, and guidance counselors? That’s nonsense, at least in northern schools. In my case, I had no more than three black teachers throughout primary and secondary school.

Starting in the 1960s, the values that made for civility came under attack. Corporal punishment was banned. This was the time when the education establishment and liberals launched their agenda that undermined lessons children learned from their parents and the church.

Sex education classes undermined family/church strictures against premarital sex. Lessons of abstinence were ridiculed, considered passé, and replaced with lessons about condoms, birth control pills, and abortion. Further undermining of parental authority came with legal and extralegal measures to assist teenage abortions, often with neither parental knowledge nor parental consent.

Customs, traditions, moral values, and rules of etiquette are behavioral norms, transmitted mostly by example, word of mouth, and religious teachings. As such, they represent a body of wisdom distilled through the ages by experience and trial and error.

The nation’s liberals—along with the education establishment, pseudo-intellectuals, and the courts—have waged war on traditions, customs and moral values. Many people have been counseled to believe that there are no moral absolutes. Instead, what’s moral or immoral is a matter of personal convenience, personal opinion, what feels good, or what is or is not criminal.

We no longer condemn or shame self-destructive and rude behavior, such as out-of-wedlock pregnancies, dependency, cheating, and lying. We have replaced what worked with what sounds good.

The abandonment of traditional values has negatively affected the nation as a whole, but blacks have borne the greater burden. This is seen by the decline in the percentage of black two-parent families. Today, a little over 30 percent of black children live in an intact family, where as early as the late 1800s, over 70 percent did. Black illegitimacy in 1938 was 11 percent, and that for whites was 3 percent. Today, it’s respectively 73 percent and 30 percent.

It is the height of dishonesty, as far as blacks are concerned, to blame our problems on slavery, how white people behave, and racial discrimination. If those lies are not exposed, we will continue to look for external solutions when true solutions are internal. Those of us who are old enough to know better need to expose these lies.

I know why Democrat leaders lie to the black community about the relative importance of “racism” compared to bad decisions about whether to finish high school, whether to have sex before marriage, whether to break the law, and whether to work rather than collect welfare. The truth is that a person cannot be poor in the United States if they make good decisions. Normally, when people (of any color) make bad decisions, they learn not to do it on their own, or they find themselves advisors to help them learn. But the Democrats are there to tell those who make mistakes that their mistakes are caused by other people. This harms the people making the mistakes instead of helping them.

What is the difference between capitalism and socialism?

Over 100,000 Venezuelans pouring into Colombia from the Venezuela in order to buy food
Over 100,000 Venezuelans cross into Colombia in order to buy food

(This photo H/T Prager University)

One country that has done a good job of implementing socialism is Venezuela.

Here is an article from March 2013 from Slate, a web site that strongly favors socialism. The headline is “Hugo Chavez’s economic miracle: The Venezuelan leader was often marginalized as a radical. But his brand of socialism achieved real economic gains”. The author is “a senior writer for the International Business Times”.

He writes:

Chavez became the bugaboo of American politics because his full-throated advocacy of socialism and redistributionism at once represented a fundamental critique of neoliberal economics, and also delivered some indisputably positive results. Indeed, as shown by some of the most significant indicators, Chavez racked up an economic record that a legacy-obsessed American president could only dream of achieving.

What did Chavez do, precisely, that caused the Venezuelan economic to boom? Well, he nationalized private industry and redistributed wealth from job creators and entrepreneurs to the poor.

As The Week correctly put it, while “Chavez’s policies of redistribution and nationalization of oil assets endeared him to Venezuela’s working class” and produced many laudable results, the country’s “oil-centric economy has taken away resources from other areas that are badly in need of development.”

OK, so that’s pretty much what the Democrat party wants to do in the United States as well. Nationalize the energy sector, nationalize health care, etc. Let the government take over the private sector industries in order to eliminate “inequalities”. Raise taxes, and redistribute the money to the low income people via social programs, also known as welfare.

So, how does it work? Is socialism really an “economic miracle”?

Here is the latest from Venezuela, as reported by CNN Money. (H/T William)


Venezuelans cried at the sight of fully-stocked supermarket shelves in Colombia.

Pregnant women, children and even elderly Venezuelans crossed into Colombia on Sunday after the border was temporarily reopened, allowing them to buy basic foods and toiletries — rare commodities in their home country.

Tearful Venezuelans had gone weeks without basic food items like milk, flour and toilet paper. It’s a sad but common part of daily life today in crisis-ridden Venezuela, a country that has the world’s largest proven reserves of oil. Colombian officials estimate that about 100,000 Venezuelans crossed the border.

Venezuela is expected to dive deeper into the abyss this year, according to new projections published Wednesday by the International Monetary Fund.

The IMF forecasts Venezuela’s economy will shrink 10% this year, worse than its previous estimate of 8%. It also estimates that inflation in Venezuela will catapult to 700% this year, up from the earlier guess of about 480%.

“Venezuela’s economic condition continues to deteriorate,” says Alejandro Werner, chief Latin America economist at the IMF. The estimates for growth and inflation are the worst worldwide.

The numbers are just the tip of the iceberg. Venezuela is deep into a humanitarian crisis — people are dying in ill-equipped hospitals and many live without basic food items. Venezuela can’t pay to import goods because its government is desperately strapped for cash after years of mismanagement of its funds, heavy spending on poorly-run government programs, and lack of investment on its oil fields.

[…]It’s all even more tragic given that despite Venezuela’s oil abundance, its state-run oil company, PDVSA, is broke. Venezuela’s oil production fell to a 13-year low in June, according to OPEC, of which it’s a member.

That’s what you get when you let the government take over the free enterprise system, or even when you just stifle the free market with burdensome regulations and high taxes. That’s what socialists in Venezuela did. That’s what the Democrat party would do. They’re  two sides of the same coin.

Dennis Prager

Dennis Prager put out a good video recently explaining the problems with socialism:

Why would anyone prefer a system that encourages some people to feel entitled to what other people create and earn? We want a system that is focused on serving your neighbor – not stealing from them.

Arthur Brooks

If you would like a very brief introduction to capitalism, also known as the free enterprise system or the free market system, then you can watch the videos below, featuring Arthur Brooks, president of the American Enterprise Institute.

Here is the first one, which explains the myths that most Americans are taught about capitalism in school and in the culture:

An important advantage of capitalism is that it lifts people out of poverty. The poorest people in America live much better than the wealthy in Venezuela.

And the second video explains what capitalism offers to individuals for their fulfillment, which socialism does not:

Earned success makes people happier, which is at least as important as the wealth benefit.

We can compare the results of each system by looking at where it’s been tried. Capitalism lifts people out of poverty – all the people in the society who are willing to work are lifted out of poverty. Even the people who can’t work in a capitalist society enjoy the benefits of charity from their neighbors – when people do well, they give more money away. Socialism drives those who work and those who don’t work into poverty, and eliminates charity. No one has anything to share when everyone is poor.

Related posts

Thomas Sowell: does affirmative action help minorities to get ahead?

Economist Thomas Sowell
Economist Thomas Sowell – the best economist in the world

My favorite economist, Thomas Sowell has an article in Investors Business Daily that explains what affirmative action really does to minorities.


Affirmative action is supposed to benefit black and other minority students admitted with lower academic qualifications than some white students who are rejected.

[…]Despite much media spin, the issue is not whether blacks in general should be admitted to higher-ranked or lower-ranked institutions.

The issue is whether a given black student, with given academic qualifications, should be admitted to a college or university where he would not be admitted if he were white.

Much research over the years has confirmed… that admitting black students to institutions for which their academic preparation is not sufficient can be making them worse off instead of better off.

I became painfully aware of this problem more than 40 years ago when I was teaching at Cornell University and discovered that half the black students there were on some form of academic probation.

These students were not stupid or uneducable. On the contrary, the average black student at Cornell at that time scored at the 75th percentile on scholastic tests. Their academic qualifications were better than those of three-quarters of all American students who took those tests.

Why were they in trouble at Cornell, then? Because the average Cornell student in the liberal arts college at that time scored at the 99th percentile. The classes taught there — including mine — moved at a speed geared to the verbal and mathematical level of the top one percent of American students.

The average white student would have been wiped out at Cornell. But the average white student was unlikely to be admitted to Cornell in the first place. Nor was a white student who scored at the 75th percentile.

That was a “favor” reserved for black students. This “favor” turned black students who would have been successful at most American colleges and universities into failures at Cornell.

None of this was peculiar to Cornell. Black students who scored at the 90th percentile in math had serious problems trying to keep up at MIT, where other students scored somewhere within the top 99th percentile.

Nearly one-fourth of these black students with stellar qualifications in math failed to graduate from MIT, and those who did graduate were concentrated in the bottom tenth of the class.

There were other fine engineering schools around the country where those same students could have learned more, when taught at a normal pace, than at a breakneck speed geared to students with extremely rare abilities in math.

[…]Mismatching students with educational institutions is a formula for needless failures.

The book “Mismatch” by Sander and Taylor is a first-rate study of the hard facts. It shows, for example, that the academic performances of black and Hispanic students rose substantially after affirmative action admissions policies were banned in the University of California system.

Instead of failing at Berkeley or UCLA, these minority students were now graduating from other UC campuses. They were graduating at a higher rate, with higher grades, and now more often in challenging fields like math, science and technology.

[…]Does the actual fate of minority students not matter to the left as much as their symbolic presence on a campus?

Now, you might ask yourself on what basis Sowell makes all these assertions, so here are a few of his academic publications about affirmative action, which are state-of-the-art:

Now, I was recently talking to a friend who has empirically false views on a number of topics. He is opposed to capital punishment, opposed to gun ownership, supports affirmative action, and so on. When I ask him why he believes these things, he doesn’t point to any evidence. I offered to give him studies showing that capital punishment has a deterrent effect on crime, that concealed carry laws reduce violent crime rates, that affirmative action laws harm minorities, etc.

If we really want to help minorities, we have to do what makes sense according the evidence. We have to aim to do good, not just feel good.