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Six Economic Myths Heard from the Pulpit

by Robin Klay and C. Gryzen

Robin Klay is associate professor of economics at Hope College in Holland, Michigan. Christopher Gryzen is one of her students. This article appeared in The Christian Century, February 22, 1995, pp. 204-208. Copyright by The Christian Century Foundation; used by permission. Current articles and subscription information can be found at www.christiancentury.org. This article prepared for Religion Online by Ted & Winnie Brock.



Economists and clergy have often been at loggerheads. In the early 19th century, economists were accused of practicing the "dismal science," a reputation which flowed from Thomas Malthus's deeply pessimistic predictions. He warned that world population pressures would inevitably perpetuate grinding poverty. Today, in contrast, morally sensitive people accuse economists of being too optimistic about economic growth and the benefits of technology. To outsiders, they seem to be technicians coldly manipulating models.

But despite their limited perspective, economists have useful insights about practical matters. They evaluate such things as what kind of tax will do the least harm, or what environmental-protection measures will least impede economic growth. They consider what approaches to welfare best preserve incentives to work and save, or what type of banking system does the best job of getting money from the people who save to those who can put it to productive use. They concern themselves with how policy design and implementation in all these matters affect income and opportunity gaps between the haves and have-nots. Clearly, these are all social issues with important moral implications. As a result, those who address our moral obligations and spiritual destiny need to understand economics.

The oldest dispute between clergy and economists regards the ethics of charging interest. The early Christian church believed that the scriptures clearly forbid interest; it cited the Old Testament law stating that Israelites must not charge interest on loans to each other. The church decided that Jesus' teaching about loving our enemies superseded even the Old Testament provision allowing Israelites to charge interest on loans to foreigners. Over the centuries, theologians such as Thomas Aquinas reaffirmed this stricture against interest--or usury, as it was called.

Only toward the end of the Middle Ages and in the early years of the Reformation did Catholics and Protestants relax this standard. Calvin, looking at the context of the Old Testament law, decided that the point of the ban on usury was that we should treat poor people with generosity. The needs of the poor were not to be occasions for profit-making. He observed that the scriptures actually said nothing about business loans. Further reflection on the fruitfulness of money as business capital convinced most Christians to accept interest. Since business loans make increased profits possible for borrowers, it is only fair that lenders share in the profits. Furthermore, lenders deserve to be compensated for forgoing the use of the funds in their own businesses or for their own purchases.

Even so, there are still organizations today, like Habitat for Humanity, that refuse to charge interest on loans to poor families. Habitat families invest their "sweat equity," working alongside volunteers in constructing their own homes. Habitat takes the scriptural teaching against interest seriously, but not because its leaders are economically illiterate. They understand that the Old Testament teaching on this subject was meant to ensure that God's people, recalling their own deliverance from bondage, looked after the needs of poor families.

Economists began to carve out their own intellectual domain only in the late 1700s, separating their discipline from that of moral philosophy. The founder, Adam Smith, had a rather cheerful view of human economic activity, especially in societies in which strong moral foundations guide public behavior and free, competitive markets reward with better profits and higher wages those producers and workers who make good decisions. In the Wealth of Nations, Smith wrote:

Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society which he has in view. But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to the society.... He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. ... He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention.

Many pastors from Smith's day down to our own time have questioned this conviction that the powerful incentive of self-interest is a servant of the public good. Yet most economists, as well as many people living in countries newly committed to economic reform, overwhelmingly affirm Smith's views on the importance of free markets. They are unparalleled in their power to unleash the creative energies which can raise living standards above subsistence.

A large part of the misunderstanding between clergy and theologians on the one hand and economists on the other is simply the result of their different focus on human choice. Christian thinkers concern themselves with the motives underlying individual choices about working, buying, producing, and sharing the economic pie. We are called to do all these things as unto God, in grateful stewardship of God's gifts and for God's purposes. Economists, on the other hand, take human motives--both high and low--for granted. They then analyze the effect of such things as changes in prices, wages, interest rates, time scarcity and taxes on the choices we make, the incomes we earn and our present and future living standards.

Some common misunderstandings about economics interfere with Christians' ability effectively to express their moral concerns and calling in their private economic choices and in influencing public policy. One need not fear that dispelling certain myths will rob pulpits of their power to teach and challenge. No economic system, however well articulated, mimics the kingdom of God. Nonetheless, a better understanding of both the salutary and corrosive impacts of economic forces should prepare pastors and lay Christians to discern where the real moral issues and grace-full opportunities lie.

1) Humans compete over a fixed pie. Should those who care about the welfare of the poor adopt simple lifestyles because by so doing they make available more food, energy and other resources to less developed countries? Those who answer yes usually present the following scenario: We Americans use X percent of the world's resources. If we would constrain our demands, more could be used by poor people. This view of the world assumes that only a limited amount of energy is available; consequently, if one country's citizens use more, the people of other countries will have less. But this is not true. There is not a fixed pot of energy. Rather, there are known supplies of oil, coal and other natural resources whose quantities tend to expand as their prices rise, making it more profitable to explore for new deposits. These price increases also encourage the development of substitutes. For example, petroleum-based kerosene replaced whale oil for lighting in the 19th century, and then electricity took its place in the 20th century. That prices of non-oil commodities are today 30 percent below their 1980 level suggests that our ability to use technology to reduce our dependence on raw materials is far greater than the "no growth" pessimists of the late '70s thought.

Even less is it true that when, for example, U.S. livestock producers buy more soybeans from Brazil, the result is less food for Brazilians. When the international market pays a good price for bean exports, then land, labor and other resources are drawn into production. The land may previously have been uncultivated or used for some other crop, perhaps food. Not only does the land now earn more, but labor devoted to bean production and processing is also better rewarded. The higher wages, profits and rents earned in soybeans allow the workers, farmers and input suppliers to buy more food and other necessities--either domestically produced or imported.

Where this does not happen, it's usually because of poor government policy and counterproductive regulation, not immoral market motives and behavior. For example, in many Third World countries women raise most of the food crops but are not allowed to own property in their own names. Without title to their land, enterprising farmers don't have the collateral to apply for loans for fertilizer, irrigation wells and other equipment that can increase their output. Furthermore, in many developing countries price regulation in favor of providing cheap food for urban residents has been a devastating disincentive for food producers to increase their production. But when few regulatory and legal barriers to production exist, both buyers and producer/sellers benefit from trade. It is not a win-lose situation.

Simple living has much to recommend it on spiritual grounds, since it may liberate us to focus on God's nonmaterial riches and priorities. There is even some truth in the contention that our adopting a simple lifestyle can help the poor here and abroad. However, that benefit can come only if we use the savings in our living costs to assist poor people in acquiring the re- sources and skills needed to support themselves. When our mothers said, "Clean your plate, because children are starving in China," they meant to teach us something about manners and gratitude. They did not expect that cleaning our plates would solve world hunger. Similarly, the best economic rationale for simple living is not that it leaves more natural resources on the plate for others, but that it increases our capacity to give. This motive, firmly rooted in biblical teaching, is the issue to which we now turn.

2) Property rights are absolute. Some Christians claim that the Bible says little about economics and that it uniformly endorses private property rights. Indeed, they argue, God so much affirms the institution of private property that one of the Ten Commandments denounces stealing as a major sin. Furthermore, some claim that when the Bible urges us to help poor people it refers only to voluntary charity, not to government-mandated (coerced) aid.

Though the bible does indeed look dimly on stealing, it also qualifies the use of property in ways that do not fit well with a completely hands-off view of government. This is especially true of the Old Testament law, which required the people of God to pay tithes to support temple worship and to help the poor. It instructed farmers to leave a corner of their fields unharvested for the poor to glean. This was more than voluntary charity. It was a sort of communal tax, designed to provide for those unable to feed themselves. It's the Bible's version of a "safety net."

Some Christians argue that these Old Testament laws do not apply to a secular society like ours. However, the spirit of the scripture requires every decent society to institute mechanisms to protect the poor, who "will never cease out of the land" under any economic system. Societies that neglect to do this will, the scripture says, answer to God for their hardheartedness. Of course, the Bible sets an even higher standard for those who follow God. Over and over again, the people of God are reminded that they must express their gratitude for having been rescued from slavery and sin by being openhanded toward those in need.

There is room for debate about how comprehensive the safety net should be, and whether it is best funded and managed by local or national governments or by private voluntary agencies. Conservatives rightly emphasize that generous welfare payments may have the serious moral and economic consequences of making people dependent or disinclined to work. They know that a "war on poverty" cannot be won through the technical prowess that put "a man on the moon." Human freedom, motivation and social relationships make poverty extremely complex. Liberals, on the other hand, remind us of the biblical caution that people do not always deserve either their wealth or their poverty, and that pulling oneself up by one's bootstraps is often impossible without help. Communities are strongest when a portion of the gap in resources available to rich and poor is bridged, and when each generation is presented with the opportunity to "make good."

3) The rich are rich because the poor are poor. Is capitalism the exploitation of the "have-nots" by the "haves," as some critics claim? This, of course, is the classic Marxist position. However, both Catholic and Protestant liberals have flirted with similar interpretations. Their concern is appropriate since the single most prominent economic theme in the Bible is God's desire that the critical needs of the poor be met through both systematic and voluntary remedies. Even so, there are some built-in errors in the liberal position.

Studies do not confirm the assumption that over time capitalism widens the gap between the rich and poor. Economic growth under capitalism can either widen or narrow income gaps. Whether it does one or the other depends largely on how widespread is the access to such valuable assets as land, education, credit and basic health care. With primarily market-driven economies, South Korea and Taiwan have exhibited both rapid economic growth and a narrowing of income gaps between rich and poor. Their progress points to the virtue of a "trickle-up" approach to development, one that unleashes the productive powers of the poor through land redistribution, education and regulatory reform.

By contrast, Mexico, Brazil and most other Latin American economies (which have only recently begun to break out of a sort of bastardized, patrimonial capitalism) exhibit greater degrees of income inequality. Fifty-one percent of Brazilian and 40 percent of Mexican incomes go to the richest 10 percent of the population, in contrast to only 28 percent of South Korean. These results illustrate the inadequacy of a purely "trickle-down" approach to economic development which fails to remedy the problems of wealthy families' favored access to public services and markets.

It is also inaccurate to think of market exchange as a case of one party (such as an employer or seller) ripping off another (a worker or consumer). People take certain jobs and not others or buy from one source instead of another in order to maximize their own gain from these exchanges. The employer's choice of a worker and the seller's choice of a customer are governed by similar intentions. Both parties gain. Furthermore, the enlargement of markets, which occurs when either transportation costs fall or artificial barriers to international trade are lowered by mutual agreement, tend to increase the net gains of all parties. Why? Because competition opens up new options to buyers of goods and sellers of labor. It also makes possible growth in the economic pie, as people and resources move toward activities in which they are more productive.

The best news is that the economic development that can quickly raise Third World standards of living far beyond subsistence is already happening. In the 18th and 19th centuries, average incomes in the U.S. and the United Kingdom doubled every 50 to 60 years. Today the doubling rate for income in South Korea and China has fallen to ten to 11 years. Asia's recent economic growth makes plausible the Economist's projection that "within a generation, perhaps half of today's poor nations could be rich by current standards." Not surprisingly, this outcome for Third World people will also entail better markets for rich countries like our own. Economics is about win-win growth, not about winners and losers; across the world, the gaps between rich and poor nations are closing.

4) Cooperation is good, competition is bad. Is cooperation more Christian than competition? Some people believe that competition in business (unlike sports) is unhealthy and often immoral--an effort to "do in" other producers in the same market. Competition is often criticized even if the means employed are legal and ethical, such as offering lower prices or better quality.

What is the basis for these moral qualms about business competition? Perhaps it's a presumption of unworthy motives, such as the desire to win at someone else's expense. Yet this need not he either the motive or the result of competitive behavior. Using their special knowledge of markets, many responsible entrepreneurs aim to provide useful, high-quality products and services to consumers. In coordinating human and material resources and technology, they respect the integrity and creativity of their workers, as well as the health and character of the communities in which they operate. Furthermore, competition may actually enlarge the market for a product so that many producers gain, as has been the case with audio and video recording.

Competition does result in the failure of firms unable simultaneously to serve customers well and earn competitive incomes for their workers and stockholders. Is this bad or avoidable? Surely business failures mean real costs to workers who lose their jobs, to materials suppliers who lose sales, and to stockholders who lose on their investments. On the other hand, attempts to stifle competition ostensibly to "save jobs"--as with trade restrictions, governments bailouts or regulations to make shutting down very difficult--ultimately weaken incentives for producers to energetically serve consumers' interests. Thus, during OPEC's big oil price hikes,. Detroit producers, protected by quotas on Japanese imports, were sluggish and unimaginative in meeting consumer demand for fuel-efficient cars. Furthermore, European regulations that make going out of business difficult and costly contribute to the slower growth of new business and the higher rates of long-term unemployment there. By increasing the size of potential investor losses if the business is not successful, these regulations reduce the number of new business ventures and job growth.

Rather than stifle competition for the sake of existing industries, governments do better to stand out of the way so that people and money released from failed businesses can flow into more productive, expanding sectors. Of course, the widespread social benefits of vigorous competition make it appropriate for a society to use public- and private-sector initiatives to cushion the most vulnerable people from the worst effects of job loss. Such is the intent, for instance, of laws that yoke the lowering of trade barriers with programs to retrain and relocate workers.

But though competition is socially useful and may be entered into with the highest of motives, isn't cooperation more Christian? Well, markets do involve lots of healthy cooperation within firms and between firms and their suppliers. It's what we commonly refer to as "teamwork" in business. In many ways, the spirit of common purpose and sharing that makes some of us nostalgic for the past is present within the best modern firms. In other firms the competitive environment has been used as an excuse to weaken the bonds of community among fellow workers. Such firms can gain a great deal by developing a spirit of mutual cooperation rather than ruthless, personal competition.

Still, we might wonder whether cooperation among car manufacturers or steel firms or furniture makers or computer chip producers wouldn't be a moral advance over competition. Research in economics and industrial organization suggests otherwise. Adam Smith observed that producers often conspire to take advantage of consumers. Building on his insight, modern economists can demonstrate how great is the temptation (and financial reward) for producers whose control of a market allows them to restrict production and overcharge consumers. Not all collaboration by firms in the same industry is at the expense of consumers, but this is always a danger. It is widely recognized and dealt with in antitrust law and in the deregulation which has introduced competition into the telecommunication, transportation and banking industries.

5) Profits are a form of exploitation. Are profits "unearned income," extracted through some form of exploitation of the poor? Many who criticize capitalists assume that they simply put their money into operations to which others contribute their labor. Capitalists are said to take unfair advantage of their special knowledge about markets in order to make profits at someone else's expense. But the essence of capitalism is the use of the head (caput) to put practical knowledge to work. In any economy, a crucial resource is knowledge--practical knowledge of untapped talents, unexploited resources and unmet consumer wants and needs.

No economic system can harness this knowledge for the social good without providing incentives to those who possess it. Profits reward efforts to acquire and employ knowledge. They can be excessive when they result from unfair leverage over workers, suppliers or consumers. They may even be artificially inflated by government restrictions on competition or guarantees against losses. But in a reasonably competitive economy, profits are essential rewards attracting producers into needed industries. In this sense, Adam Smith's "invisible hand" does work to promote the general good, though it is not in itself sufficient.

6) Individual freedom is the highest good. Is total freedom for the individual pursuit of self-interest in the marketplace the best guarantee of morality and progress? Though this idea may not be preached from many Christian pulpits, it is espoused by some Christian (as well as libertarian) economists. At the same time, a striking argument to the contrary is being made by other conservative voices, like that of Michael Novak. In The Catholic Ethic and the Spirit of Capitalism Novak argues that neither democratic institutions nor markets can by themselves make human beings flourish. They must be balanced by strong moral and cultural institutions, such as families, schools, churches and other voluntary associations that serve the common good. These institutions habituate us to the practice of essential private and social virtues, like honesty, self-control and kindness, without which neither markets nor democratic governments can function well.

Novak argues that Jewish and Christian scriptures and teachings provide the firmest grounds for the American belief in fundamental human rights and for the free exercise of human creativity encouraged by the system of market rewards. These religious traditions also teach us that human beings seek both self-interest and the common good. We each possess unique talents, knowledge, calling and destiny, yet we are also social creatures with a common Creator and a common destiny. We are subject to the shared liabilities of finitude and sin. Much more than any unitary socialist system, the threefold system of democratic capitalism--which honors political, economic and moral-cultural freedoms--tends to call forth individual and collective efforts that contribute to the common good.

Citing Pope John Paul II, Novak says that humans are made not for the freedom of the libertine but for the ordered liberty that respects human nature and vocation. He opposes "primitive capitalism," characterized by ruthlessness. Total reliance on markets is not morally adequate, since some human needs go unmet by markets, some things should not be bought and sold, and some groups lack the resources necessary to participate in markets. Markets must, therefore, be tamed, guided and supplemented by democratic and moral-cultural institutions.

In an economy that deemed individual freedom of choice the highest value, markets in sex, divorce and babies for adoption would be directed purely by the forces of supply and demand. However, a society that honors human nature accepts some trade-offs between individual freedom and social well-being by, for instance, outlawing or heavily regulating such markets. Thus, babies available for adoption do not go to the highest bidder; prostitution is banned or regulated; and neither divorce nor abortion is available on demand.

Furthermore, humane societies do not leave socially, psychologically and physically handicapped people at the mercy of the brute forces of Darwinian competition. Through some combination of public and voluntary efforts, these people are given subsidized jobs or are otherwise provided with the physical and social necessities of life. Children whose families are unable to give them the education necessary for productive lives are helped with scholarships, loans and direct provision of education by governments or churches and other voluntary organizations.

In addition, humane societies seek to cushion workers who lose their jobs due to recessions, foreign competition and technological change by offering them short-term unemployment benefits and financial assistance for re- training and relocating. Finally, through private and public insurance, as well as by direct provision of services, those whose health, old age or youth prevent them from fully supporting themselves receive the help they need to live in dignity. In all these ways, moral and democratic forces work to balance and tame markets for the sake of social justice and well-being.

Readers may have noticed that we have not balanced myths "on the left" with an equal number of myths "on the right." This is not meant to suggest that the errors of liberals are more dangerous than the errors of conservatives. They do, however, tend to enjoy greater currency among intellectuals generally and Christian leaders in particular, and thus need to be discussed in greater detail.

Even so, it would be foolish to abandon the errors on the left only to fall prey to those on the right. Moral leaders must continually teach that individuals have responsibilities to each other in a humane society. Narrow self-interest, though a powerful incentive for the production of material wealth, does not cement communities. We all need encouragement to exercise a new vision of the public good, and to join with others in sacrificial efforts to achieve that good in concrete ways, ranging from providing housing for the homeless to parks for everyone and enriched educational environments for disadvantaged children. Learning to understand economics can assure Christians that working together and individually they can make a difference--one which does not depend for its outcome on some far-off systemic revolution.

 


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