QE3, the Bible, and Economics, Part 5 – Entrepreneurship


Service to others

In seeking understanding of the effect that QE3 will have on our economy, this essay briefly discusses the function of entrepreneurship and the responsibilities of the entrepreneur. The most important person in the Bible justifies the existence of this role.

To quickly recap, when God cursed mankind and all of Creation after the Fall, he introduced scarcity into the world. Scarcity meant that men would now have to work much harder to complete their dominion assignment (Genesis 1:28). It also meant that men would have much greater reason to work together, thus limiting the amount of evil men would do.

From the curse springs forth the division of labor. By applying God’s laws (do not steal, do not bear false witness, do not kill), men learn to work together in cooperation. They sign contracts and honor them. This means people specialize: some become employees, some become consultants, some become entrepreneurs.

THE IMPORTANT ROLE THE ENTREPRENEUR PLAYS

In the economy, the entrepreneur plays a very important role: he bears the risk of uncertainty in his quest for profits. An entrepreneur must attempt to predict what consumers are going to want in the future and build the means of supplying those wants today.

An entrepreneur will purchase the factors of production — as opposed to consumer goods, or final products — and raw materials so that he can produce consumer goods. He anticipates that he can sell the consumer goods he will produce at a profit over and against the entire cost of his expenses in acquiring the raw materials (land and labor) and the other factors of production (machinery, tools, etc).

The market has rules, and with those rules come sanctions, both positive and negative. If the entrepreneur is successful, he will profit (positive sanctions). If he predicts consumer tastes incorrectly, he will suffer losses (negative sanctions).

AN EXAMPLE FROM THE GREATEST ENTREPRENEUR OF OUR TIME

Steve Jobs was perhaps the greatest entrepreneur in the past 100 years. He knew about entrepreneurship and meeting future consumer demand: “It’s really hard to design products by focus groups. A lot of times, people don’t know what they want until you show it to them.” He has also famously said that “It’s not the customer’s job to know what they want.”

It doesn’t take too much straining for you to see the benefits to customers that entrepreneurs bring to the market. Steve Jobs innovated our lives with his Apple products. Take the iPod as an example. The MP3 player market was a sad sight in the late 1990’s, and Steve Jobs, being an entrepreneur, recognized an opportunity. He correctly predicted that consumers really did want MP3 players, they just wanted players that were functional with pleasant — not clunky — interfaces and which could be operated by regular people (instead of tech nerds).

As a result, Apple (and Steve Jobs) reaped the reward in billions of dollars in profits. The consumers rewarded Apple for giving them what they wanted better than all of the other competitors.

As time went on, other competitors sprung up. As a result, the prices of MP3 players dropped, and they became much more functional over time. Later models, at a smaller price, contained many more benefits to the consumer than the initial models did.

This is the benefit of free-market capitalism to consumers and entrepreneurs alike: entrepreneurs serve the consumers, and such successful servants are rewarded by the consumers with profits. The wealth and status of the entrepreneur is elevated, but to gain access to that wealth he had to serve the consumer.

JESUS PROVIDES THE EXAMPLE

Jesus taught us that service is the way to leadership and legitimate power:

But Jesus called them to him and said, “You know that the rulers of the Gentiles lord it over them, and their great ones exercise authority over them. It shall not be so among you. But whoever would be great among you must be your servant, and whoever would be first among you must be your slave, even as the Son of Man came not to be served but to serve, and to give his life as a ransom for many.” (Matthew 20:25-28 ESV)

The greatest among you shall be your servant. Whoever exalts himself will be humbled, and whoever humbles himself will be exalted. (Matthew 23:11-12 ESV)

There’s always a price to be paid; Jesus paid the ultimate price so that we may be saved. Entrepreneurs must also pay the price. Entrepreneurs are so richly rewarded — compared to non-entrepreneurial workers who are paid much smaller salaries — because they pay the high economic price: bearing the burden of the element of risk.

Employees seek stability and security. Entrepreneurs seek profits. With this comes much greater risk because they may also suffer catastrophic losses that regular employees don’t typically experience. But the products and services entrepreneurs provide improve the lifestyle of everyone, rich and poor alike.

Dr. Gary North provides an excellent summary of the role of the entrepreneur in the free market:

The free market order is based on a principle of service analogous to the one that Jesus set forth as binding in the church. The producer must serve the customer if he wishes to maximize his return. He must act in the present as a representative of future customers. He must forecast what they will be willing and able to pay in the future. Then he must enter the market for production goods. He must buy or rent them, restructure them, store them, advertise them, and deliver them to paying customers. If he misforecasts, he will produce losses. If he forecasts correctly, he will produce profits. [1]

This is a noteworthy idea that bears repeating: in terms of the five-point Biblical covenant model, the entrepreneur serves the consumer by acting in the present as a representative of future customers. This is the second point: hierarchy. [2]

ENTREPRENEURS AND THE INTEREST RATE

One aspect of the entrepreneur’s task is to examine current prices of labor and materials in estimating his total expenses to determine whether or not he thinks a particular idea will be profitable.

One of the indicators he may use is the prevailing rates of interest for borrowing capital. Entrepreneurs typically borrow capital (money) from wealthy investors or banks in order to acquire all of the factors of production he’ll require. The cost of that borrowed money must be factored into his calculations.

Ideally, the entrepreneur faces a situation where the prices for materials, labor, and money will be less than the revenue he can generate by selling the final product, thus securing him a profit.

However, he may run into the situation where he finds that though materials and labor may be cheap and in high supply, the cost of money (borrowing, interest rates) is too high. As a result, he would determine that, since the endeavor won’t be profitable because it costs too much to borrow money right now, he does not pursue the endeavor.

This is an important idea that you must remember. Let me repeat it: if the cost of money is too high such that it does not make an endeavor profitable, the entrepreneur will not pursue the endeavor. This concept plays a fundamental role in determining what kind of impact QE3 will have on our economy.

RIVAL SCHOOLS TO FREE MARKET ECONOMICS

Unregenerate man tends to reject free-market capitalism and substitute an economy of his own making. Instead of an economy based upon the Bible-revealed laws of God, men seek to replace free markets with planned markets.

Planned by who? Men. Bureaucratic committees who distrust the market economy to allocate resources, and who so attempt to take hold of this responsibility themselves. The result is predictable: shortages of certain goods and services, and gluts of others.

Consumers tend to be left short of the things they need and drowning in things they don’t want. Man reverses the market order: producers are made sovereign over the consumers. If the producers manufacture things the consumers don’t want, the consumers are compelled to purchase them one way or another.

The reasons for this increasing oppression and restraint of the free-market are numerous. As Mises wrote about human interests generally and about entrepreneurs specifically:

“There were and there will always be people whose selfish ambitions demand protection for vested interests and who hope to derive advantage from measures restricting competition. Entrepreneurs grown old and tired and the decadent heirs of people who succeeded in the past dislike the agile parvenus who challenge their wealth and their eminent social position.” [3]

Mises noted that selfish ambitions lead to certain groups of people calling on the coercive power of the Federal government to give them a permanent competitive advantage. The source of these desires is sin, the covetousness of greed which is idolatry (Colossians 3:5).

As a nation strays further and further from its Biblical foundation, its means of economic production becomes increasingly twisted. Just as God’s image in man is twisted by sin, so becomes the economy that is overwhelmed by an adulterous, idolatrous nation.

CONCLUSION

In this essay you learned that entrepreneurs benefit the consumer. They play an important role in society: they take upon themselves the burden of risk in pursuit of profits. Entrepreneurs represent, today, the consumer of tomorrow. Successful entrepreneurs are to be faithful servants of the consumers.

Entrepreneurs who accurately forecast future consumer desires will be rewarded with profits. Those who do not will suffer losses.

Entrepreneurs bear greater risk than employees, so as a result their rewards are greater. But their failures are also greater. Entrepreneurs do not have the stability and job security employees tend to possess.

Entrepreneurs analyze current market prices of raw materials, labor, and capital (via interest rates) and calculate whether their endeavor will be profitable. They bid up the prices of producer goods to acquire them for purchase in the production of consumer goods.

Unregenerate men reject free-market capitalism because they seek autonomy from God. While the free-market appears to be random and chaotic, Christians know that it’s actually in God’s hands, for he is the ultimate planner. Unrepentant sinners hate this, and in their unrighteousness they seek to wrestle control from God and substitute themselves as the ultimate planners.

This drama plays out in government intervention into the markets. The government passes legislature that favors certain groups over others to keep out competition. The consumers, who are sovereign, are the losers in this drama. They receive fewer innovative products, and they experience higher than market prices because competition is squashed.

The next essay will bring all of the past five lessons together and predict the impact that QE3 will have on our economy.

_____________

1. Gary North, Priorities and Dominion: An Economic Commentary on Matthew, 2nd ed. (Dallas, Georgia: Point Five Press, 2012), p. 354.

2. Ray R. Sutton, That You May Prosper: Dominion By Covenant, 2nd ed. (Tyler, Texas: Institute for Christian Economics, [1987] 1992), ch. 2.

3. Ludwig von Mises, Human Action: A Treatise On Economics (Auburn, Alabama: Ludwig von Mises Institute, 1998), p. 269.

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2 responses to “QE3, the Bible, and Economics, Part 5 – Entrepreneurship

  1. Pingback: QE3, the Bible, and Economics, Part 4 – Interest Rates | Rebuild America's Biblical Worldview

  2. Pingback: How much is your time worth outside of work? | Rebuild America's Biblical Worldview

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