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A Christian Understanding of Economics: Mutual Gains from Trade

By Eric Schansberg

It is common for Christians to be relatively uninterested in economics. Within politics, those who are socially and theologically conservative tend to focus on matters of personal righteousness (e.g., gambling), community standards (e.g., prayer in schools), and especially “social justice” (e.g., “life” issues such as abortion). But in such contexts, economics is used as a small component of a broader argument, seen as a side issue, or simply ignored.

In contrast, those who are socially and theologically liberal often focus on economic outcomes, “economic justice,” and economic policy—but ironically, without much knowledge, interest, or concern about economics. The good news is that such “justice” concerns are prevalent in the Scriptures. We worship a God of justice—who defends those who are vulnerable and expects His disciples to do the same. But good intentions are likely to trump good outcomes—especially when there is confusion or ignorance about the means embraced to reach godly ends. In a word, those on the Left often pursue economic policies that are unbiblical and impractical.

Moreover, Christians—like most people—tend to be relatively uninformed about political economy. “Public Choice” economists note that voters are “rationally ignorant and apathetic” about activity in political markets. As citizens, we have one vote—or if we’re more involved, a few hundred bucks and some time—to contribute to the political process. As such, it’s not worth our time to invest much in the political process. What’s the benefit in learning about a wide array of public policies, studying the set of political candidates offered to us at elections, or more important, arriving at a coherent and consistent Christian worldview of government and public policy. In the end, we don’t get involved—or our zeal in the political arena is not nearly matched by our knowledge of economics and politics.

To the extent that Christians are interested in economics, they typically share the same concerns as those in the World—mostly with respect to the macroeconomy and its impact on their daily, material life: How is the job market? What will happen to the stock market and the housing market? What will happen to interest rates and inflation? . . And so on.

But it turns out that the microeconomic roots of the macroeconomy are crucial to everyday life. They are not discussed as much in the news or at the dinner table—or rather, when they’re discussed, they’re not recognized as “economics.” Fortunately, the basic principles of microeconomics are easy to understand—as simple as they are important and powerful in explaining and predicting behavior.

In the beginning…
From the first few chapters of Genesis, we can infer a number of important Biblical concepts about the world God has created for us—principles that are essential for a Christian worldview in economics and politics.

First, God cares about material creation. We are not simply spiritual beings. We have been placed on an Earth—within a physical Creation—put together with great power and care. It was, after all—and still is—“very good” (1:31; cf. Jas. 1:17). Thus, material things have value in the divine economy.

Second, within that Creation, we are called to be “fruitful”—materially and spiritually. We are called to multiply—which requires better use of the resources we’ve been given. And we are called to extend (appropriate) dominion over the Earth—the people, animals, plants, and other resources over which God has given us stewardship (1:28; 9:1,7).

Third, God created by turning darkness and chaos into light, order, and beauty (1:2-4). We are created in God’s image (1:26), and so we are to do likewise. We are to intervene within our world—as possible, to turn bad and messy into good and orderly. We are to overcome the “silence of Adam” (3:6b)—to become involved when passivity can be so tempting. We are to “create”—given what God has given us to work with—in terms of our abilities and the surrounding resources.

Fourth, we are to bless God and others as we have been blessed by God (1:28, 12:1-3). We are to pursue teamwork and community as we do our work. Genesis 1:26 refers to the Trinity in Creation; Genesis 1:27-28 implies the complementarity of male and female; and Genesis 2:18-20 makes the teamwork of marriage quite explicit. Christianity is a communal and relational faith and action, not solely the domain of individual belief.

Fifth, work is meant to be a blessing—the first thing to which Adam was called (2:15). Work even precedes the first institution, marriage (2:20-25). Although marriage is often a key part of our calling, more broadly, it is our Kingdom work that should be foremost. After the sin of Adam and Eve, work would turn out to be more challenging (3:17-18). Work as a blessing would still be possible, but more difficult to achieve. Work can easily become “toil,” but like all other things, it needs to be redeemed at the foot of the Cross.

Sixth, there’s more to life than economic activity. Cain’s sons are impressive in the marketplace (4:20-22). But apparently, they have no relationship with God. Even more noteworthy, God “rests” on the 7th day. In Exodus 20, the Sabbath is motivated by God’s pattern in Creation; in Deuteronomy 5, it is motivated by the rest they received in escaping their slavery in Egypt. God invented the weekend, and so there is to be a balance between work and other.

Seventh, God equipped us with free will. The “tree of the knowledge of good and evil” is present in the center of the Garden, and beyond that is not surrounded by an electric fence. Although our freedom to choose is naturally constrained by heredity and environment, shaped by social and cultural factors, and influenced by markets and laws, we always maintain some ability to choose. This extends from mundane decisions about what to wear and eat for lunch to decisions about whether to glorify God, to follow His will, and to disciple under Jesus Christ.

Where Does Economics Come in?

Of course, economics runs through all of the above—sometimes directly, and always, at least indirectly. Moreover, an implicit understanding of economic principles—if not an explicit knowledge of economic theory—is required to do these things well. Let’s start with the first thing discussed in every Principles of Economics textbook: “scarcity.” In short-hand, economists define this concept as “unlimited wants and limited resources.” (You might quibble that you are “content” [Phil. 4:6-8], but if I were to offer you one million dollars with no strings attached, you would prefer to steward more resources than fewer—at least to give it away to someone else.)

This leads to the necessity of choices, the presence of trade-offs among choices (monetary and non-monetary benefits and costs), and what economists call “opportunity costs”—the value of the second-best alternative. In other words, when we make a choice, we give up the alternative uses of those resources. Since we have not mastered omnipresence, we cannot be in two places at the same time. Likewise, the resources under our stewardship cannot be used for A if they’re being used for B.

Good decisions about resources—whether in our personal lives, in business, or in public policy—generally require a strong understanding of the benefits and costs of all viable options. Failing to “count the costs” is a common cause of bad decisions in any realm.

Voluntary, Mutually- Beneficial Trade

It also follows that one can devote resources to direct and indirect uses. I can pluck a dandelion and add it to my own salad. Or I can pluck a bunch of dandelions and barter with someone to acquire a pepper. Or I can sell the dandelions to obtain resources to purchase something else.

This takes us to the most important model within economics: “voluntary, mutually beneficial trade.” In general terms, two parties weigh the expected costs and benefits of a transaction and then decide to exchange X for Y. This concept can be applied to product markets (e.g., buying a shirt), services (e.g, paying for a haircut), labor markets (e.g., renting your labor services for wages and fringe benefits), and credit markets (e.g., loaning money to [or borrowing from] a bank). Moreover, this concept holds in domestic and foreign markets. To an economist, it does not matter whether the two parties happen to reside in the same community, region, or country.

Two noteworthy caveats. First, although the most obvious examples are material in nature, it turns out that mutually beneficial trade does not at all require material goods. For example, one can purchase non-material services—from a consultant’s information to enjoying a concert. Or one can willingly part with money through donations (e.g., giving money to a church or a charity), receiving nothing material in return. Second, even when something material is involved, nothing material is necessarily created by the mutually beneficial trade. Again, we are prone to imagine examples where someone is paid to add a widget to a thingamabob in order to make a watchamajigger. But trade only requires an exchange. For example, if I spend $20 on a shirt, then both before and after the trade, there is a $20 bill and a shirt. What changed? Only who possessed each item. Apparently, the shop-keeper preferred the $20 bill to the shirt. And I preferred the shirt to the $20 bill. How is value created when nothing material has changed? The subjective value we place on the two items, given our tastes and preferences, allows each party to be better off after the exchange.

U.S National Debt Clock at approximately 7:35 pm, April 22, 2011: $14,317,734,700,000

U.S National Debt Clock at approximately 7:36 pm, April 22, 2011: $14,317,735,000,000

Voluntary?

So, what’s behind this model? What assumptions are inherent in this frequent outcome? First, we’re assuming that the transaction is, in fact, voluntary. For example, assume that I’m pointing a gun at you and asking you for your money, and you decide to comply with my request. Your decision is voluntary in the sense that you still have “free will”; but it is not at all voluntary in the plain sense of the word. Although there are degrees of ability to exercise choice, moving down the spectrum toward coercion is not what we have in mind.

Likewise, “voluntary” implies that you have choice—or more precisely, choices. So, if one is in a context of significant monopoly power, then the transaction is less voluntary than the ideal. Dealing with the electric company and deciding to pay taxes are fundamentally different than choosing from among dozens of restaurants for dinner.

Information Problems

Information problems provide another key caveat. First, note that I said “expected” costs and benefits. In other words, we rarely know what all of the costs and benefits will be. In most contexts, we draw inferences based on the limited, available evidences, last—or be in style. And so on.

Information problems are so common that economists generally ignore them unless they are significant—in other words, they get in the way of the standard we’re trying to describe here. In particular, information can be especially troublesome when one party has significantly more information than another (e.g., selling a used car), when information is difficult to process (e.g., trying to understand something that is high-tech), and when market mechanisms like “reputation” are less impressive in regulating ornery behavior (e.g., tourists and one-time purchases). In such cases, the information advantage is similar to monopoly power where one party can (easily) take advantage of another party.

Fraud is a common category of this concern—in particular, that people lie about something significant or they know something important that they fail to communicate. What constitutes fraud is an important ethical and legal question. But for our purposes, the point is that imperfect information is somewhat common, and abuses of it are something to be considered.

The Bible speaks to fraud—in condemning improper weights and measures (Lev. 19:35-36; Prov. 11:1, 16:11, 20:10, 20:23; Micah 6:11). As a contemporary example, imagine this issue with gasoline. When you pay for ten gallons of gas, how do you know that you’re getting ten gallons of gas? Some of my students say they trust the gas station owner; others say they trust the little sticker from the government agency that claims to monitor such things (annually). In any case, they don’t know—and it would be quite costly for any customer to know. (Likewise, the Bible also speaks to moving landmarks—again, taking advantage of information problems to steal land. See: Deut. 19:14; Job 24:2; Prov. 22:28, 23:10-11; Hos. 5:10.)

Rationality?

One final consideration related to information: the ability of market participants to effectively weigh costs and benefits. Aside from the above considerations about limited and asymmetric information, do people always weigh costs and benefits effectively, given the information they have? This is the question of “rationality” where economists generally assume that people process information, weigh benefits and costs ably, and make reasonable decisions. (If we assume that people are often irrational, then economics becomes impossible. To note, if people are truly irrational, then we can’t predict or explain what they might do!)

But this ends up being difficult to discern— and the subject of some debate. Consider three examples. First, if I see someone eating anchovies on a pizza, I might think that’s crazy. But there are a variety of rational reasons why one might see this phenomenon. Most notably, there’s no accounting for tastes and preferences—and so, we allow for subjective ideas of personal satisfaction and move along in our analysis.

Second, if someone smokes crack, the economist would say they presumably do this because they expect that the benefits outweigh the costs. But wait! We all know—or at least most of us know—that the costs of smoking crack outweigh its benefits. So, we’re left with claiming some objective standard where crack smokers are misinformed; they routinely fail to weigh all of the benefits and costs; they are unable to make decisions well; . . and so on. Third, what does the non-believer think of the believer’s decision to attend church regularly, restrict themselves from certain behaviors, and donate 10% or more of their income to the church? Now that’s crazy! Again, even though the believer knows that these are the proper decisions, not surprisingly, those who don’t share their perspective and beliefs will come to very different conclusions.

Government as a Means to an End

For the Christian, we know that “sin nature” impacts man’s ability to weigh benefits and costs—to make good decisions, whether in the economic arena or elsewhere. In fact, sin can be defined as a failure to weigh benefits and costs properly. To note, if God knows what’s best for us, and wants what’s best for us, then going His way is in our best interests, by definition. Moreover, sin and sin nature allow some people to take advantage of others—whether through the use of coercion or fraud. People may take advantage of monopoly power or information asymmetries. They may seek government restrictions on their market competitors to coercively benefit themselves at the expense of others. They might prey on those who are vulnerable. They might ask the government to take money from some people to give to them. And so on.

What is the Christian to do with this? Well certainly, to start with, we should not engage in these activities. Such things are sinful—and not loving to God, others, or even, ourselves. What should Christians do when seeing these sins done by others? We should not cooperate with evil. At times, we should speak out against evil—or take more active steps. In particular, when should we embrace or pursue government as a means to this end?

A category distinction is helpful here. We might seek laws when people are doing significant harm, but mostly to themselves— what I call “legislating morality.” Let’s clarify this a bit. Arguably, every sinful choice does at least indirect harm to others. But then, we would be open to seeking legislation for every sin—not a tenable position. It can even be argued that every good thing we do causes harm to someone. For example, if I decide to eat at restaurant X, I’m not eating at restaurant Y—and thus, doing economic harm to the latter. Obviously, this is also a non-starter in trying to figure out when to pursue legislation.

It’s far easier to make a biblical and logical case for seeking legislation when direct and significant harm is done to others—what I call “legislating justice.” This is consistent with God’s justice and revealed will toward those who are oppressed, particularly the relatively vulnerable. It is also consistent with the ministry of Jesus Christ who got upset when the rights of others were being violated (e.g., the Pharisees trying to prevent healings; the monopoly power of the Temple merchants).

Two Examples

Let’s apply this to two areas of economics and public policy. First, many mainline and conservative Christians are opposed to gambling—not just personally, but even to the point of activity in the political arena to oppose its legality or expansion. To an economist, gambling would generally be considered an example of mutually beneficial trade which is attractive to some people, given their tastes and preferences. As such, it is a form of entertainment—a service where one willingly parts with money for the possibility of winnings and the experience of the gamble’s thrill. (There are potential caveats here: if the State is the monopoly provider of legal gambling; if the publicized odds are fraudulent; if some people are “irrational” as they gamble; if the social costs [akin to pollution] are sizable; and so on.)

Oftentimes, efforts to “legislate morality” on gambling are based on erroneous arguments. Some will say that it’s sinful. First, that’s not inherently true. (Consider: What are the principles that would make gambling a sin?) Second, if it’s true, the practice is selectively condemned within the church. (When was the last time you heard a preacher rail against raffles or a scratch-off game at a fast-food restaurant?) Third, even if it’s sin, we’ve already noted that sinfulness cannot be a solitary criterion to invoke legislation.

Others will argue that gambling is not useful in terms of the economics—that it doesn’t create jobs or economic activity. This confuses the point we made earlier—that voluntary trade creates value, even when nothing physical is created. Voluntary trade—whether gambling or buying a shirt—is not a zero-sum game, but is expected to enhance the well-being of both parties. If not, we’d have to make a similarly silly complaint about the supposed economic drain of a Steven Curtis Chapman concert or even tithes and offerings given to the local church.

Second, what about the government’s provision of K-12 education? Government schools have tremendous monopoly power over consumers, particularly over those with less income. Not surprisingly, the results are often low quality, thick bureaucracy and a lot of red tape, high cost to taxpayers (more thans $10,000 per student or $250,000 per classroom of 25 students), and a restricted social menu (e.g., insisting on one way to teach sex or science).

Clearly, this policy does a lot of damage to students, parents, and taxpayers. The cost of K-12 education is far more expensive than it would be in a competitive environment—as extra money is taken from taxpayers. Students/ parents go “voluntarily,” but are “strongly encouraged” to deal with a government entity which has tremendous monopoly power. Those who are relatively poor and vulnerable are a captive audience to a system that has little incentive to serve them well in such a vital arena of life.

Christian political involvement here would be an obvious example of “legislating justice”— improving the economics from monopoly to competition, from public sector to private sector, from vulnerability to having more choice. Policy options here range from educational vouchers to tuition tax credits, from the availability of charter schools to friendlier laws toward home-schooling.

More broadly, when should Christians advocate government as a means to various ends in economics? Are there occasions when we should work to restrict international trade, increasing prices for consumers and restricting opportunities for foreign producers (often those who are quite poor)? Are there occasions when we should seek subsidies for others—taking money from some people to give to others, typically members of politically-connected interest groups? It is difficult to make a biblical case for such political activity.

International Poverty- and an Application to Foreign Aid and Foreign Trade

Economic prosperity is the exception across world history. There are relatively few examples, in a relatively narrow range of time, where economic scarcity has not been quite painful for people. Economists debate some things. But we are quite clear on the cause and effect of material prosperity: respect for property rights, rule of law and an effective court system, a stable money, low tax rates, limited corruption, and free trade. With these in hand, countries experience economic growth and prosperity; without these, their people experience economic stagnation and deprivation.

How can we help those in other countries who are less fortunate than us? There are two basic options: foreign aid and foreign trade. Foreign aid is one government taking money from its own people to give to foreign governments with the hope that those resources will find their way to needy people. “Aid” is a dubious process ethically (should we take from some people to give to others?). From a practical standpoint, it’s ironically labeled, given its frequent failures. This is not all that surprising given that aid rarely speaks to the underlying causes of economic prosperity detailed above. And perversely, it often serves to entrench corrupt regimes as they line their pockets with our “aid.”

The other option is foreign trade. This takes us back to the subject of the essay—the ethical and practical benefits of voluntary, mutually-beneficial, wealth-creating trade. We can encourage trade rhetorically. Beyond that, we can enhance trade by eliminating our trade barriers, especially those with less-developed countries— another form of “legislating justice”.

Foreign missions and microfinance are two other interesting aspects of economic “trade.” In mission work, Christians voluntarily give time, talent, and treasure to serve those in foreign countries, hoping to help those who voluntarily receive in both spiritual and material terms. And in micro-finance, organizations loan out funds to voluntary recipients, in a context where traditional banking is difficult because of poor political and economic conditions, allowing entrepreneurs to grow businesses and expand economic opportunity.

Conclusion

The greatest and wildest form of voluntary, mutually-beneficial trade is our potential acceptance of the gift of God’s grace, manifested most obviously in the atoning sacrifice of His Son’s death on the cross. How we respond to that grace is the next most important set of trades we’ll make with the Church and with the World—extending that grace to Christians in community and to the World in our efforts to woo them, voluntarily, into the Kingdom of Light.

Eric Schansberg (Ph.D. Texas A&M) is a professor of economics at Indiana University Southeast. He is the author of numerous articles in economics and public policy and authored the books, Poor Policy: How Government Harms the Poor (Westview Press) and Turn Neither to the Right nor to the Left: A Thinking Christian’s Guide to Politics and Public Policy (Alertness Books).

This article is from the Areopagus Journal Christian Economics Volume 10 Number 4

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