The Clashing Worlds of Economics and Faith

May 28, 2008

Chapter 2- Allocation of Resources

Filed under: Uncategorized — Tags: — jdtapp @ 8:27 pm

Again, economics is the study of the choices people make in the presence of scarcity. We have limited resources to fill our wants. So, who should get what?

Halteman’s gasoline example is a fair one. How should one solve this problem both ethically and efficiently? Capitalism essentially solves the dilemma with the auction method.  We can illustrate that it’s the most efficient, but ethical and equitable are subjective measures.

If gasoline were distributed equally to everyone then some people would have more than they need and others less. Those with more would likely sell to those with less. The sellers would be forced to charge a price the buyers would be willing to pay, and thus the gasoline would end up being allocated efficiently, meaning everyone gets their optimum amount at a given price. So, it is most efficient just to allow the market to handle the allocation. In any market the price will be what the market will bear.

In the oil crisis of 1973, the U.S. set a ceiling on the price of gasoline. The artificially low price created long lines of people buying gasoline, eventually leading to a shortage.

Generally speaking in economics (and pages 29-34), price motivates production. People need food, goods, and services. The amount people work depends on how much they are willing to produce (vs. how much leisure time they’re willing to give up) at a given price for their production. A rational person analyzes the tradeoffs between leisure and work.

supply curve

Here is a basic supply curve. As the price for something goes higher, people are willing to produce more of it. A price ceiling (say if P1 or P2 were mandated), ends the point at which people are willing to produce the good. If the cost for producing an additional gallon of gasoline (the marginal cost) is greater than the revenue from selling an additional gallon, then the producer will stop production. In 1973, this was seen all over the U.S. economy. There are some poignant video clips of poultry farmers throwing baby chicks into barrels to drown and dairy farmers pouring milk out on the ground because it cost too much to take it to market for the price that the government mandated be offered for the service. Things became very inefficient. That’s why economists react in horror to talks of price controls for gasoline today.

However, there are other reasons listed for working. In the former USSR, unemployment was illegal. A person had little motivation to produce other than the government telling him to do so and reminding him constantly that the government-provided goods and services he enjoyed was made possible by everyone working. The government made decisions about what should be produced, where, when, and by whom, and how many resources it should take to produce it. Economists and engineers were trained solely for that purpose. The rationale was that science and mathematics could determine allocation more efficiently and equitably than pure market forces.

On pg. 29, the author mentions that Christians “have more than their own material gain as a motivation for work.” We should also work to serve others and use our occupations missionally. This might be a radical departure from working simply to meet our needs, but I think the importance in working missionally should be on how we work, and not necessarily why we work (Colossians 3:17).

The key to capitalism is that “the production market is brought together with the allocation market, exchange activity goes on continuously with people spending and receiving money and reacting to market signals.”

A good story illustrating the complexity of how the market produces goods is shown in this short story, “I, Pencil” by Leonard E. Read. No one person produces a pencil. It’s produced by thousands of people who have never met each other but were simply pursuing their own self-interests and responding to market signals.

On pg. 31, Halteman reminds us that in the Middle Ages, production and profit-seeking were considered unspiritual. Monks and priests who devoted their lives to service and study were held up as examples of überspiritual. Post-reformation, economic activity was looked upon more favorably and a person’s material abundance was seen as evidence of God’s blessing. (This could create another motivation to work—to be seen as “blessed.”).

To sum up Halteman’s points and my examples above, a controlled economy produces inefficiencies. The government might set out for a noble cause (like more affordable gas for all) but will end up with unintended consequence of shortages and a population unmotivated to produce goods at the mandated price. “History shows that markets organize economic resources far better than planners” (35). The capitalist model of production requires a great amount of freedom to let the market determine the price.

The author closes by saying we will now “explore the notion that believers must go beyond the best the secular world can do in life,” and suggests there might be an alternative value system.

Discussion Questions:

  1. Of all the moethods of allocation, do some feel more/less Christian than others?
  2. Is it true that allocation systems cannot be evaluated purely on how Christian they appear to be, but also on how they structure production incentives?
  3. Is it necessary for Christian people to have the material reward incentive in order to be productive, or is working a natural response to God’s gift of resources and grace?
  4. Illustrate, with examples from various cultures, the three motivations to work. Should others be added?
  5. – if anyone is familiar with those texts please comment.
  6. If optimal production-input combinations depend on the relative scarcity of the factors of production more than on the conclusions of intelligent engineers, what strategy for third-world economic development would you recommend?
  7. Why might someone argue that auction class registration will lead to better classes than a first-come, first-served method?

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