Thursday, October 30, 2008

13.4 Money, Materials, and Society 1

It is with great pleasure that I jettison part of this section into the first draft stage:
For the last two thousand years, Christians have rarely had the opportunity to decide how their goods are produced and distributed. On a small scale, groups like the Shakers (1700-1900's) or the group that settled in Oneida, New York (1800's) formed small communes where their goods were shared in common. Today, the Amish live in close community as well, although they recognize the existence of private property. But for the majority of Christian history, Christians have had little choice but to live within whatever political and economic structure they were born into.

Before the industrial revolutions of the modern age, most economies were agrarian, as in biblical times. People produced goods off the land, consumed some of them, and perhaps traded some of them with others for things they did not produce themselves. However, we should not think that everyone had their own land. In medieval times in the Western world, a king or "lord" owned the land, which was farmed by others who owned no land at all. Those who worked the land might be the slaves of those who owned the land, or they might be "serfs" of one kind or another who worked the land in return for protection, basic sustenance, or some pittance of pay.

The Industrial Revolution of the 1700's and 1800's in the Western world massively transformed the economies of everything in its wake, leading to the industrialization of the East in the twentieth century as well. Industrialization is the process of becoming a society that functions off of manufactured products rather than farm products. When we speak of developing countries in the southern hemisphere today, we are referring to countries that are only now undergoing this process of transformation.

Before the rise of industry, power in Western society lay primarily with landowners and kings, the owners of the farms produced the means of living. The powerful were the long standing aristocracies, the "best" of society who owned land. This "landed gentry" gained increasing power even as the power of kings declined.

But the 1700's and 1800's saw a shift in power to those who possessed and controlled capital, rather than just land. Capital is all the resources a person has at his or her disposal for production and exchange, including things like money, equipment, products and, of course, land. The rise of railroads and steam ships facilitated this exchange over distances previously impractical.

[textbox: capital, industrialization]

It is into this world that Adam Smith (1723-1790), the "father" of capitalism, wrote his most famous piece, The Wealth of Nations. Capitalism is an economic system in which individuals and companies own capital that they use to compete against each other to make a profit off the buying and selling of goods and services. The background of Smith's economic theory was the utilitarian philosophy of Jeremy Bentham that we discussed in the previous chapter.

If you remember, the goal of utilitarianism was to make a more equitable society by basing laws on what would bring about the greatest pleasure for the greatest number. For Bentham, everyone counted the same. The pleasure of a king counted just as much as the pleasure of a child working in a coal mine. The utilitarians thus wanted to build a society where everyone's interests were taken into account.

Adam Smith formulated an economic model based on this general goal and idea. Here is a famous passage from The Wealth of Nations (I paraphrase a little to make the meaning clear). The passage is actually talking about importing goods from other countries, but we can see in it the basics of Adam Smith's economic theory.

"The annual revenue of every society is always the equivalent of what it is able to exchange from what its industry produces. It is exactly the value of its products that it can exchange. Every individual, therefore, tries to use his capital to support domestic industry, so that the amount that is produced adds up to the greatest value possible. Every individual also works so that the annual revenue of the society is as great as he can make it.

"Of course, it is not that this individual was actually intending to promote the public interest, nor does he know how much he is promoting it. When he prefers supporting domestic rather than foreign industry, he is only thinking about his own security. By making his industry produce the greatest value possible, he is only thinking of his own gain. But in this as in many other cases, he is led by an invisible hand to promote an end that was not a part of his intention.

"Nor is society always the worse because it was not his intention to benefit it. By pursuing his own interest he frequently promotes that of the society more effectively than if he really was trying to promote it" (Wealth of Nations 4.2)

Smith's basic theory is that as we each pursue our own economic interests, we will often find that, as if "led by an invisible hand," society as a whole will benefit, including the other individuals in that society. On an individual level, let's say that I have some goods that I want to sell to you, and you are interested in buying them. Let's say further that the government allows you and me to agree on the price, rather than telling me what to charge or you what to pay.

Here's what Smith says will often happen. As a seller looking out for my own interests, I will try to get as high a price for my goods from you as I can. Meanwhile, you are also looking out for your own interests and will try to pay me as little as you can. The result is that you and I will meet in the middle with a price that maximizes the benefit to both of our interests.

This sort of "de-regulated" approach to economics, where the government allows you and I to rankle over prices, is called laissez-faire capitalism, which is French for "to allow to do." Laissez-faire economics favors letting the business markets rankle over prices and rules rather than some government setting the boundaries for such things.


Another name for this school of thought is "classical liberalism." Today, the word liberal is more often associated with opposition to capitalism, but we should remember that the word basically means "free." The free enterprise system and laissez-faire economics were thus termed "liberal" originally because they believed individuals and companies should be free to set prices and the terms of trade without government intervention. Ironically, therefore, the economic "conservatives" of today come closest in philosophy to the classical liberals of the 1700's and 1800's.

Another principle of capitalism we should mention is the law of supply and demand. This is the idea that as the supply of a certain product goes up, the price will generally go down, since people have more venues from which to get it and thus more competition between those selling it. When the price of oil goes down significantly, sometimes oil producing nations agree to decrease the amount of oil they are producing, so the price will go back up. Similarly, the United States government in the late twentieth century actually paid certain farmers not to put their grain on the market so that the price would not bottom out from two much supply.

Similarly, as the demand for something goes up, the price will generally go up. This dynamic is especially apparent in a crisis, such as when a natural disaster interrupts the normal flow of things like gas to a particular area. Sellers of things in such high demand are sometimes accused of "price gouging" or setting a price ridiculously high because there is high demand and no competition around, so that buyers of the product have little choice but to pay the exorbitant price.

These sorts of exceptional situations are where economists begin to debate how free the market should be and whether some government regulation might actually be necessary to keep the overall system functioning the way it is supposed to function. Adam Smith's laissez-faire theory was formulated when firms were small and run by individual owners, not in a global economy with industry on a massive scale.

We saw in the last chapter that, even in the early 1800's, John Stuart Mill (1806-1873) suggested some significant modifications to the utilitarian philosophy of his father and Bentham. The same was no less true of Adam Smith's economic theory. For one thing, Mill recognized that you cannot always count on people either knowing or doing what is in their best interest.

Even in the early 1800's, Mill argued that the "authorized representatives" of society would need to intervene when the interests of the buyer were jeapardized (my "translation"):

"As a general rule, the business of life is better conducted when those who have an immediate interest in it are left to make their own course... Industry is generally the best equipped to choose the path in its best interest. But can we affirm with the same universality that the consumer or person served is? ... Is the buyer always qualified to judge the commodity?

"If not, then letting competition in the market run its own course does not apply. And if it is a very important commodity in which society has much at stake, it may be preferable to have some degree of intervention, by those who are the authorized representatives of the collective interests of the state" (Principles of Political Economy).

When a person does not know what is in his or her own best interest, then certainly the basic principles of free enterprise play into the hands of the other person, who is following the principle of self-interest to get the best deal he or she can. In fact, it is--at least in the short term--in the best economic interest of a person to try to deceive or manipulate the other person if they can get away with it. Of course it may not be in the long term, for if customers come to recognize that you are a shady dealer, they will tell others and then your business will drop sharply.

In a global economy, however, where buyers and sellers do not live together, knowledge of whether you can trust the other party becomes a critical issue. Adam Smith and his compatriots could not have imagined a world where people buy things over the internet or where the seller is so far removed from the buyer. By the late 1800's, the loopholes in a purely laissez-faire approach to economics had become all too apparent to the average U.S. citizen. Government agencies such as the Interstate Commerce Commission and the Food and Drug Administration have evolved over time to ensure that industry is honest in the way it presents its products to consumers who buy them.

A second problem with Smith's economic theory that Mill addressed was the tendency of individuals to follow their habits rather than their self-interest (again, paraphrased):

"When it comes to individual property, the way products end up being distributed is the result of two determining factors: competition and custom...

"Politcal economists generally... are used to putting their entire stress on competition... and to take little account of what people are accustomed to doing...

"Because the habits of people resist competition to such a significant extent, ... even when the competition is the greatest, we can be sure that where people are content will smaller gains and find more pleasure in things other than monetary gain, competition will not allow you to calculate what they will buy... Customers are sometimes used to higher prices and they acquiesce in it" (Principles of Politcal Economy).

The basic thrust is that people don't always operate in their best economic self-interest. What this fact means is that although economics is a science, you cannot predict what the markets will actually do.

What is important to realize about these "founding fathers" of capitalism is that they really had the overall betterment of society in view. The capitalistic system was not an end in itself. It certainly was not a system set up to reward some new aristocracy of the cleverest merchants of industry, while punishing the person who wasn't adept enough to compete. It certainly was not some evolutionary scheme set up for the survival of the fittest.

Indeed, Adam Smith himself had this comment to say about how the wealth of the rich might be used to the betterment of the poor in society (my paraphrase again):

"The survival of the poor costs a society a great deal... Meanwhile, the rich spend most of their money on the luxuries and vanities of life. So it is not ridiculous to suggest that the rich might contribute to the expense that the public spend on the poor, not only in proportion to their income, but even proportionally more than their income" (Wealth of Nations).


Anonymous said...

Two issues that are brought to mind:

1) Should the ideal Christian's approach to economics in a capitalist economy be to spend a great deal on local industries on things, even if sometimes non-essential, to keep the general welfare up? Or is it better to distribute the money to the growing have-nots to meet basic necessities?

2) Is it plausable for the ideal Christian not buy from companies that are known to exploit people (in relation to how we no longer know those who produce the goods)?

Anonymous said...

The IRS reports that the top 1% of taxpayers pay 39% of all taxes in the US and the top 25% pay 86% of the taxes. That leaves 75% of Americans the responsibility of paying 14% of the tax burden. Looks like the so called rich are already carrying the burden for most of America. How much more should the top 1 or 10% of the rich pay? I guess you and Obama would suggest that they pay more so that the 30% who pay no taxes can get a check on April 15 complements of those who are already carrying the rest of the national tax burden.

Those figures are close to the church, 20% give 80% of the church budget.

Ken Schenck said...

Brian, it's hard for me to imagine that a Christian with excess would not give to many altruistic causes. I would imagine common sense works pretty well with boycotting and such.

Craig, I wouldn't dare suggest numbers. Just so the record is clear on Obama, his proposal is to repeal the Bush tax cuts for people earning over 250,000 dollars a year. That's nothing like a "redistribution of the wealth." It's going back to what their taxes were at the beginning of the Bush administration.

Most of us can't even imagine what it would be to earn that much--not even the real Joe the Plummer, although he'll probably be there next year just because of the current hype. I love the commercial with all the women saying they're Joe the Plummer. I can imagine a funny version of the commercial with their palatial homes in the background or a caption beneath that says things like "I'm worth 3 million dollars" or "I earn 750,000 a year."

Anonymous said...

Well Ken, I guess you believe that figure from Obama. You will see it will be adjusted and you will probably get to show your partiotism and unselfishness by paying higher taxed too. I am sure you will not mind. Yes, tax those evil rich, how dare they use their ability and talent to achieve more than others.

::athada:: said...

I can't imagine that the top 1% wage earners are "burdened" by their tax rate. It'd be nice to have that problem :) ... maybe.

Warren Buffet has noted that he pays a higher % of his earning than his secretary b/c most of his money comes from capital gains, which are taxed at 15% (maybe a little higher for the rich?) vs. the secretary's money, which is all earned income.