QE3, the Bible, and Economics, Part 3 – Free Market Economics


The Free Market Economy

In the previous essay I described the function of money as being a transmitter of value through time and space. You and I see this function manifested through the price mechanism of the free-market economy.

To understand the foundation of the free-market economy accurately, as Christians we must remember some vital truths:

Are not two sparrows sold for a penny? And not one of them will fall to the ground apart from your Father. But even the hairs of your head are all numbered. (Matthew 10:29-30 ESV)

For by him all things were created, in heaven and on earth, visible and invisible, whether thrones or dominions or rulers or authorities—all things were created through him and for him. And he is before all things, and in him all things hold together. (Colossians 1:16-17 ESV)

Nothing in this universe happens randomly. What appears to us to be random market forces — price fluctuations, variances in demand, etc. — are all guided, ultimately, by the Lord. As Christians we can be certain that the “free market forces” can be trusted because all things have been predestined by the Father:

In him we have obtained an inheritance, having been predestined according to the purpose of him who works all things according to the counsel of his will (Ephesians 1:11 ESV)

So you can think of it this way: “In him the free-market holds together.”

In his economic commentary on Genesis, Gary North wrote:

“What Hayek and other secular defenders of the free market
have failed to understand is this: it is precisely because the market is
not impersonal with respect to God and His law-order that it can be
said to be impersonal with respect to the plans and actions of any
single participant.” [1]

Consequently, the market’s operations are the result of millions of individuals making decisions and taking actions.

THE MOST BASIC PRINCIPLE

The basic economic principle that everyone is (probably) familiar with is “supply and demand.” When demand for a product increases, the price of that product will go up because all of a sudden there isn’t enough of it to meet the old (lesser) demand.

Prices increase because consumers bid the prices up: “I’ll pay more than the asking price because I want it more than the guy in front of me does.” In this instance, money is the agent that transmits individual desires into the market. If more people show up and are willing to also bid the price of that product up, the seller will realize that he should raise the price to meet the demand.

The same is true if consumer demand falls. If a seller realizes that he can’t sell any units at a given price, he will lower the price until he meets the actual consumer demand price-point. In the free-market, the consumer is sovereign — they call the shots, not the producers. Producers cannot force a consumer to spend his money (Generally, anyway. There can be exceptions, as will be made clear later.) [2]

THE QUEST FOR PROFITS IS GOOD FOR THE CONSUMER

If prices are bid up because of an increase in consumer demand, the producers of that product will increase their production levels so that they can sell more units of that product — at least, they should.

Because, as it turns out, high prices are signals to competitors that there is consumer demand that is not adequately being met, so in their search for profits they may decide to go into the business also and produce a similar product.

In order to gain a competitive edge over other sellers, the new producer will find ways to optimize his production process and lower his costs so that he can sell the product at a lower price point than the first guy. This will entice consumers to buy from the new producer instead. If he hopes to stay in business, the first producer will then be forced to also lower his prices or either increase the value by selling a better product.

Either way, the consumer wins. We either get lower prices, which we always like, or we get more bang for our buck.

PRACTICAL EXAMPLE FROM CURRENT EVENTS

An excellent example of this supply-and-demand/high-bid-wins mechanism is the iPhone 5 release. The official retail price for a 32 GB iPhone 5 during the launch window  is $750. On ebay, they are being auctioned off at upwards of $1000.

Priced at retail for $750, this iPhone 5 sold for $1185. For a premium of $435, you can get yours now instead of waiting 3+ weeks for the back-orders to clear out.

Priced at retail for $750, this iPhone 5 sold for $1185. For a premium of $435, you can get yours now instead of waiting 3+ weeks for the back-orders to clear out.

This is an example of demand out-stripping supply. Though the “retail” price is $750, it’s more accurate to say that the actual price is closer to $1000.

There are other costs factored into that $250 premium. For example, to get an iPhone 5 at the retail price on launch day, you would have to have lined up with everyone else. You pay that premium with your time. What would your time in line be worth? Would you be productive, earning money while waiting in line? Most people aren’t. By waiting in line you may be forfeiting income you could have otherwise been earning.

But maybe the people waiting in line are entrepreneurs who are getting phones early so that they can re-sell them, collect the premium, and make a profit. In that case, their time may in fact be worth the time they spend in line.

ETHICS DICTATE THE MARKET

The key to all of this is money and honest contracts. People trust the people they are doing business with because they trust that neither side will the other off. They also trust the money they are receiving. They do not worry that it is counterfeit or that it won’t be accepted universally elsewhere. They have confidence in its value and integrity.

[Unlike some fake gold bars that are circulating in New York. This kind of fraud stops the gold market dead in its tracks as everyone wonders if they’ve been had. Every bar sold must be drilled and tested. This adds cost and raises the price of doing business.]

One important idea to grasp, then, is this: what drives consumer demand? Where does the idea of “honest contracts” come from that enables people to build trust in one another? Where does the idea of reliable money come from that allows people to trust it?

The answer is The Bible. The criteria that enable the free-market to operate spring forth from obeying God’s laws:

“The free market social order has a whole series of purposes for man because it is a direct outgrowth of the application of fundamental moral and economic principles that were established by God to meet the needs of responsible human agents. The free market is a part of God’s comprehensive social laworder.” [3]

The free-market exists because we keep God’s commandments. When the free-market springs forth, the division of labor becomes highly-specialized. As a result, the lives of all citizens living in a country that operates under free-market capitalism will be improved.

God’s blessings for keeping his commandments and walking in his ways are poured out onto the entire nation. The result of honesty, integrity, and strong work ethic are incomparable economic blessings.

THE REASON WHY MEN INTERFERE WITH THE MARKET

This position should be briefly contrasted with the secular humanist position. Unregenerate men turn from God and suppress his truth in their unrighteousness (Romans 1:18). Men who reject faith in God are left to toil within an impersonal cosmic universe governed by random forces.

Atheists and evolutionists who believe that life and man are the products of random quantum particles bumping around, producing life and self-awareness from lifeless primordial slime, have no other choice than to believe that those same impersonal, random forces can also overtake them at any time.

Fallen men who reject God have no hope for the future. They live in a universe devoid of hope. The best they can do, then, is attempt to take control of these cosmic forces themselves and exert their will upon the very forces that gave birth to them.

ARTICULATE PESSIMISM, THE “HOPE” OF ATHEISTIC MAN

Perhaps no finer example of this cosmic pessimism has been more articulately described than as Bertrand Russell did:

That Man is the product of causes which had no prevision of the end they were achieving; that his origin, his growth, his hopes and fears, his loves and his beliefs, are but the outcome of accidental collocations of atoms; that no fire, no heroism, no intensity of thought and feeling, can preserve an individual life beyond the grave; that all the labours of the ages, all the devotion, all the inspiration, all the noonday brightness of human genius, are destined to extinction in the vast death of the solar system, and that the whole temple of Man’s achievement must inevitably be buried beneath the débris of a universe in ruins—all these things, if not quite beyond dispute, are yet so nearly certain, that no philosophy which rejects them can hope to stand. Only within the scaffolding of these truths, only on the firm foundation of unyielding despair, can the soul’s habitation henceforth be safely built. [4]

Man, being the primitive product of randomness that sprang forth from primordial soup, humble in his origins, now seeks to take hold of the cosmos and rule the universe as a self-proclaimed god. [5]

It is for these reasons that men are unable to resist interfering in the free market. This impulse is made manifest by man’s attempts to set up endless bureaucracies to regulate this aspect or that aspect of the economy. Autonomous man attempts to set up a grandiose state, the ultimate manifestation of earthly power.

If man doesn’t take direct control of the market and allocate the scarce resources himself, then he is afraid that the wall of market forces that he is holding at bay by the power of his hands could cave in upon him and consume all that he has created for himself at any time.

Man, in his autonomous arrogance and darkened mind (Ephesians 4:18), believes that he can better direct the “forces” of the market than God can. He calls them “random forces,” but he is actually slapping God in the face.

It is man presuming to know better than God does. It is the serpent and the temptation and the Fall, all over again. (Genesis 3)

In a future essay I’ll discuss the basics of interest rates, the role of the entrepreneur in the economy, and honest money. Following that I will discuss how the free-market keeps a check on autonomous man’s desires to gather all earthly power unto himself. It’s at that point that we’ll return to QE3.

CONCLUSION

In this essay you have learned that God, as sovereign, transcendent creator and owner of all things, is directly involved in the day-to-day goings on of His creation. This means that though he is transcendent, he is also immanent: present in our lives down to the very hairs on our heads and the molecular motion of atomic particles.

Because we know that God has predestined all of history to conform to his ultimate plans, we can trust the free market as the outworking of God’s social order. The free-market springs forth from men implementing God’s moral laws.

The economy is driven by consumers and producers working together to meet each others’ needs through the market mechanism of supply-and-demand. In the economy, the consumer is sovereign; consumers dictate prices depending on whether or not, and how much, they are willing to spend on certain goods and services. Money is the agency that transmits this information throughout the economy and which adjusts prices accordingly.

Unregenerate, fallen man attempts to interfere with the market because he does not have faith in God. He sees the universe as the product of impersonal, random forces that can reduce him from his grand position back to the slime from which he was born. He therefore rejects God’s ability to govern creation and seeks to usurp God’s authority in doing so. Autonomous man has rejected God as his master and has crowned himself King. His desire to control all things as a god motivates him to try allocating all of an economy’s scarce resources himself — usually through a central-planning board or committee of bureaucrats.

Click here to read Part 4 about Interest Rates.

__________

1. Gary North, Sovereignty and Dominion: An Economic Commentary on Genesis (Dallas, Georgia: Point Five Press, [1982] 2012), p.18.

2. Ludwig von Mises, Human Action (Auburn, Alabama: Ludwig von Mises Institute, 1998), p. 241.

3. Gary North, Ibid, p.19.

4. Bertrand Russell, “A Free Man’s Religion” (1917), in Mysticism and Logic (Watford, Hertfordshire: Taylor Garnett Evans & Co. Ltd.,), pp. 47-48.

5. Gary North, Sovereignty and Dominion: An Economic Commentary on Genesis (Dallas, Georgia: Point Five Press, [1982] 2012), Appendix A.

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2 responses to “QE3, the Bible, and Economics, Part 3 – Free Market Economics

  1. Pingback: QE3, the Bible, and Economics, Part 2 – Economics 101, But Not As Taught In School | Rebuild America's Biblical Worldview

  2. Pingback: The 3 basic things that make modern mass warfare possible | Rebuild America's Biblical Worldview

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