The Economics
of the
Kingdom of God
by
James A. McCune
(Second Edition)
Second edition copyright 2011 by James A. McCune
First edition copyright 1999 by James A. McCune
All rights reserved.
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Attributions:
Scriptures are quoted from the Revised Standard Version of the bible Copyright 1946, 1952, 1971 by the Division of Christian Education of the National Council of the Churches of Christ in the USA. Used by permission.
Scriptures are quoted from the New Revised Standard Version of the bible Copyright 1989 by the Division of Christian Education of the National Council of the Churches of Christ in the USA. Used by permission.
Scriptures taken from the New American Standard Bible ®, Copyright The Lockman Foundation 1960, 1962, 1963, 1968, 1971, 1972, 1973, 1975, 1977, 1995. Used by permission.
Most scriptural quotations are from the Authorized, or King James Version of the Bible, provided graciously by His Majesty, King James, sovereign of Great Britain, in 1611.
Assume for a moment an economic system comprising eleven workers. One worker earns $200,000 per year, another $100,000 per year, three workers earn $15,000 per year, and five workers earn $3,000 per yearnot enough income to afford both food and shelter leaving them and their families homeless to wander the streets or live in the back of an old van. The final worker in our hypothetical example has somehow become unfortunate enough to end up in one of the many slave labor camps throughout the world operated by nefarious contractors to serve the competitive needs of transnational corporations, and earns only $1,500 per year. The government officials who have worked so hard and so selflessly to bring about such affluence beam with pride over their success. By letting the natural forces of the market operate unfettered, they claim, they have created an oasis of prosperity! Let’s briefly review their success.
T
he
average annual income per worker in our hypothetical example is a
respectable $32,900, an amount high enough to afford the average
family a nice place to live and a decent standard of living. Gross
domestic product per person, assuming one worker per family and an
average family size of 2.5 persons, equals $13,100 per year, also a
comfortable level for
the average family.
We could go on talking about averages, or per capita calculations of
this or that, but the truth is that this economic system doesn’t
work: it doesn’t work because it doesn’t provide even a minimum
standard of living for all its citizens. The averages
in this case disguise some very disturbing facts. In the example
above the median family income (rank incomes from highest to lowest
then observe the middle value) is only $3,000, revealing that at
least half the families in this country are unable to afford both
food and shelter even though average family income is $32,900!
In spite of the fact that this example was picked for purposes of illustration, it is an unfortunate truth that some countries of the world have a distribution of income not too different from that shown in the example. In fact, when compared with the global income distribution table above, the numbers in this little example portray the current world situation rather well! And in most countries of the world todayeven though their performance may not be as dismal as that shown in our examplethe mal-distribution of both income and wealth is such that these economies must also be labeled failures in their most important functions: providing all of their citizens with a reasonable opportunity to earn a decent living and achieve some degree of economic security.
God provided man with a detailed outline of how a sound economy should function roughly 3,500 years ago. This outline has been available to man for all these years, and has been translated into virtually every language on earth. But man has viewed the economic statutes of God as “a strange thing” (Hos. 8:12) and has made a mess of things by replacing God’s economic wisdom with his own foolishness.
Man is without excuse. The day is soon coming when the Lord will reject the wicked, the greedy, the corrupt, and the ignorant from positions of rulership over His people. When these oppressors are turned out of office the miserable economic systems they have concocted will go with them. These rejected rulers will be replaced by the saints of the Most High who will rule over the earth under Jesus Christ in righteousness. The economic laws of God, as explained in the chapters that follow, will become the laws of the land worldwide. The heavy hand of economic oppression will be removed from off the poor, neither will their faces be ground in the dirt any longer. True prosperity will break out, and not just for the few. This event will be known as the establishment of the Kingdom of God on earth.
Princeton, New JerseyJames A. McCune
June 21, 1999
And in the days of these kings
shall the God of heaven set up a kingdom,
which shall never be destroyed: and the kingdom shall not be left to other people,
but it shall break in pieces and consume
all these kingdoms,
and it shall stand for ever.
(Dan. 2: 44)
And he shall judge among many people,
and rebuke strong nations afar off;
and they shall beat their swords into plowshares,
and their spears into pruninghooks:
nation shall not lift up a sword against nation,
neither shall they learn war any more.
But they shall sit every man under his vine
and under his fig tree;
and none shall make them afraid:
for the mouth of the LORD of hosts hath spoken it.
(Mic. 4: 3-4)
The Economics
of the
Kingdom of God
Table of Contents
Introduction: The Gospel of the Kingdom of God
Chapter 1: A Primer on Market Economics
Supply, Demand, and How Resources Get Used . . . How Specialization of Labor Raises Living Standards . . . Savings, Capital, and Productivity . . . Corporate Profits and Their Contribution to the Economy . . . Foreign Trade and the Law of Comparative Advantage . . . Four Important Conditions for Free Enterprise to Benefit Society . . . Macroeconomics: Supply and Demand on a Broader Scale . . . Money, Inflation, and the Long Cycle . . . Economic Stability and the Difference Between Recession and Depression . . . A Run on the dollar and Economic Depression: Can the Fed Stop it? . . . Market Economics: the Good, the Bad, and the Ugly . . . .
Chapter 2: Global Leveling and the Third Industrial Revolution
Global Leveling and the Four Basic Conditions . . . The Notion that Global Capitalism and Democracy are Compatible is a Myth . . . Only Government Oversight Stands Between Capitalism and Chaos . . . Capitalism Needs Overhauled, Not Overthrown. . . .
Chapter 3: Economic Justice is Not Enough
The Urgent Need for Economic Justice . . . Justice is Not God’s Only Concern . . . Seeking the Balance Between Justice and Mercy . . . .
Chapter 4: The Curse of Latifundism
A Problem as Old as the Government of Man . . . Biblical Law Offers the Solution . . . Corporate Oppression Hides Behind the Law . . . The Laws of the Land Encourage Oppression . . . The Laws Must be Changed . . .
Chapter 5: Tradeoffs and Compromises
Balance and the Concept of Utility . . . Tradeoffs and Compromises . . .
Chapter 6: The Elusive Middle Road
Where Socialism Falls Short . . . Where Capitalism Falls Short . . . The Middle Road to Economic Prosperity . . .
Chapter 7: Jubilee Economics
The Economics of the Jubilee Year . . Laws Regarding the Sabbatical Years . . . Laws Regarding the Jubilee Year . . . . . . .
Chapter 8: The 7 Foundational Pillars of a Sound Economy
Pillar #1: Private Property . . . Pillar #2: Incentive . . . Pillar #3: Distributive Justice With Dignity . . . Pillar #4: Freedom . . . Pillar #5: Vehicle for the Poor to Recover . . . Pillar #6: Economic Security . . . Pillar #7: Economic Efficiency . . . . . .
Chapter 9: Laws Concerning the Disadvantaged
and the Environment
Measures to Prevent Cruelty to the Unfortunate and Needy . . . Treatment of Dependent Classes . . . Grinding the Face of the Poor . . . Kindness Toward Animals and the Environment . . .
Chapter 10: Economic Rights
Rights of Persons . . . Rights of Marriage . . . Property Rights . . . Rights of Inheritance . . .
Chapter 11: Principles of Taxation
Tithes and Offerings . . . Property Tax and Inheritance Tax . . .
Chapter 12: International Trade in Theory and in Practice
The Theory of International Trade . . . Does the Theory of Comparative Advantage Hold Up? . . . The Truth about Free Trade in the Real World . . . . .
Chapter 13: Criminal Behavior of the Global Economy:
Indictments and Solutions
1) The Big Lie of Comparative Advantage . . . 2) Grinding the Face of the Poor . . . 3) Capital with No Community Interest . . . 4) Capital Flows and Economic Instability . . . 5) Environmental Degradation . . . 6) The World Bank and the IMF . . . 7) Reserve Currency Irresponsibility. . . 8) Perverting Justice: Legislation for Sale . . . 9) A World in Which Only Bankers Matter . . . 10) Latifundism: The Ever Increasing Concentration of Wealth . . . 11) Diminishing National Sovereignty . . . 12) Women Without Protection; Children Without Fathers . . . Free Trade Will Destroy Both Prosperity and Freedom . . . A Just and Effective Economic System Will Soon Emerge.
Introduction
The Gospel of the Kingdom of God
Jesus said that the gospel of the Kingdom of God would be preached in all the world for a witness and then shall the end come. The end of what? The end of man’s kingdom, or more specifically, the end of man’s rule over himself. In the end the kingdom of man will give way to the Kingdom of God. Just what is the Kingdom of God, and when will it be set up? Who will rule in it, and what will they rule over?
A long time ago a splendid spiritual being named Lucifer was in charge of the earth. This anointed cherubbeautiful to behold and filled with wisdomwas perfect in all his ways . . . until iniquity was found in him (Ezek. 28: 12-15). His iniquity was that of rebellion, and in the chaos that resulted from Lucifer’s rebellion the earth was laid waste and the government God set up to rule over the earth became corrupted. Ever since Lucifer and one third of the angels rebelled against God’s rule history has been moving slowly, but relentlessly, toward the re-establishment of the Government of God on earth. Early on in this process of re-establishment Adam sinned and disqualified the human race from Kingship; four thousand years later Jesus Christ overcame sin in the flesh and restored mankind’s inheritance and ultimate destiny: RULERSHIP IN THE KINGDOM OF GOD. By so doing He qualified to head up that government. Notice the Old testament prophecies concerning this coming King, the future ruler of Israel and, indeed, of all the world:
But thou, Bethlehem Ephratah, though thou be little among the thousands of Judah, yet out of thee shall he come forth unto me that is to be ruler in Israel; whose goings forth have been from of old, from everlasting. (Mic. 5: 2)
For unto us a child is born, unto us a son is given: and the government shall be upon his shoulder: and his name shall be called Wonderful, Counsellor, The mighty God, The everlasting Father, The Prince of Peace. Of the increase of his government and peace there shall be no end, upon the throne of David, and upon his kingdom, to order it, and to establish it with judgment and with justice from henceforth even for ever. The zeal of the LORD of hosts will perform this. (Isa. 9: 6-7)
Behold, the days come, saith the LORD, that I will raise unto David a righteous Branch, and a King shall reign and prosper, and shall execute judgment and justice in the earth. In his days Judah shall be saved, and Israel shall dwell safely: and this is his name whereby he shall be called, THE LORD OUR RIGHTEOUSNESS. (Jer. 23: 5-6)
So we see that the anointed one, Jesus Christ, came not just to save the world, but to rule it as well:
For the kingdom of heaven is as a man traveling into a far country, who called his own servants, and delivered unto them his goods. And unto one he gave five talents, to another two, and to another one; to every man according to his several ability; and straightway took his journey. . . . After a long time the lord of those servants cometh, and reckoneth with them. For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath. And cast ye the unprofitable servant into outer darkness: there shall be weeping and gnashing of teeth. When the Son of man shall come in his glory, and all the holy angels with him, then shall he sit upon the throne of his glory: And before him shall be gathered all nations: and he shall separate them one from another, as a shepherd divideth his sheep from the goats: (Mat. 25: 14-32)
The “Kingdom of God” is a much misunderstood idea. The truth is that the Kingdom of God is the government of God:
At this point we must consider a basic principle of GOD’S GOVERNMENT. The state can never be without a head. God placed Lucifer on the throne of the earth. He was no longer administering the GOVERNMENT OF GOD [at the time Adam was created]—he was now disqualified—but he (his name now changed to Satan) must remain on that throne until his successor has qualified and also been inducted into office. The very fact that Satan was there to tempt the first humans—that he is, even now, “the god of this world” (2 Cor. 4: 4) and “the prince of the power of the air” (Eph. 2: 21)—is sufficient evidence of this basic principle of the GOVERNMENT OF GOD.1
Jesus Christ has qualified to replace Lucifer (his name changed to Satan the devil) as the head of God’s government on earth. Although Jesus Christ is HEIR to the kingdom, He has not been installed into office and Satan is still the “god of this world.” After His qualification and resurrection Jesus rose into the heavens to sit at the right hand of God until His enemies have been made His footstool (Psa. 110) . . . until the time of the restitution of all things. Notice the parable Jesus told to explain to those who expected the kingdom to come immediately in His day that, in fact, His kingdom was to come at a future time:
He said therefore, A certain nobleman went into a far country to receive for himself a kingdom, and to return. And he called his ten servants, and delivered them ten pounds, and said unto them, Occupy till I come. But his citizens hated him, and sent a message after him, saying, We will not have this man to reign over us. And it came to pass, that when he was returned, having received the kingdom, then he commanded these servants to be called unto him, to whom he had given the money, that he might know how much every man had gained by trading. (Lk. 19: 12-15)
Just as Jesus qualified for and became an heir of the Kingdom of God before being inducted into office, so too Christians become heirs of the kingdom before it is actually set up on earth and while they are yet flesh and blood. Notice the status of believers who have the Holy Spirit dwelling in them:
Flesh and blood cannot inherit the Kingdom of God (1 Cor. 15: 50).
He hath translated us into the kingdom of his dear son (Col. 1: 13).
Ye are not in the flesh, but in the Spirit, if so be that the Spirit of God dwell in you
(Rom. 8: 9)
As many as are led by the Spirit of God, they are the sons of God. (Rom. 8: 14).
If we are children, then we are heirs—heirs of God and co-heirs with Christ (Rom. 8: 17).
If ye be Christ’s, then ye are Abraham’s seed, and heirs according to the promise
(Gal. 3: 29).
In other words, being baptized into the Holy Spirit translates us into the Kingdom of God, just as Jesus was, and we become joint heirs with him of the Father’s kingdom. We who are baptized are viewed by God as though we were in the kingdom NOW, even though that kingdom has not yet been set up. Just as Satan is still the god of this world and Christ is waiting at the right hand of the Father for His induction into office upon His return to earth, we too are awaiting that induction, for WE SHALL INHERIT IT WITH HIM! And notice in Galatians 3: 29 (above, no. 6) that Paul was telling GENTILES in whom was the Spirit of God that they were children of Abraham, or SPIRITUAL ISRAELITES. Once baptized into Christ and having the Holy Spirit dwelling in you, there is no distinction between race, nationality, or sex, but all are one in Christ . . . the grafting in of the Gentiles among the natural branches is seamless, with no distinction possible between Israelite and Gentile in the kingdom:
There is in this sonship by faith in Christ no class privileged above another, as the Jews under the law were above the Gentiles (Rom. 10:12; 1 Cor. 12:13; Col. 3:11). [there is neither] bond nor free—Christ belongs by faith to the “bond” as much as to the “free.”2
Moreover, it is spiritual Israel, or the spirit-born Church of God, that will rule over the physical nation of Israel, and indeed over all the world, in the Kingdom of God (Mat. 19: 28).
Sometimes the message ABOUT Jesus gets confused with the message OF Jesus; and His message was centered on the Kingdom of God! It was this message—the gospel of the literal, world-ruling Kingdom of God—that He said would be preached in all the world before the time came for Him to return and assume His throne:
And this gospel of the kingdom shall be preached in all the world for a witness unto all nations; and then shall the end come. (Mat. 24: 14)
Notice the clear Old Testament instruction that the kingdom is to be set up IN THE LAST DAYS:
And it shall come to pass in the last days, that the mountain of the Lord's house shall be established in the top of the mountains, and shall be exalted above the hills; and all nations shall flow unto it. And many people shall go and say, Come ye, and let us go up to the mountain of the LORD, to the house of the God of Jacob; and he will teach us of his ways, and we will walk in his paths: for out of Zion shall go forth the law, and the word of the LORD from Jerusalem. And he shall judge among the nations, and shall rebuke many people: and they shall beat their swords into plowshares, and their spears into pruninghooks: nation shall not lift up sword against nation, neither shall they learn war any more. O house of Jacob, come ye, and let us walk in the light of the LORD. (Isa. 2: 2-5)
The prophet Daniel confirms that the kingdom will be set up in the latter days, in the days of the kings—and particularly the one terrible king—who attempt to bring the whole world under their control:
And in the days of these kings shall the God of heaven set up a kingdom, which shall never be destroyed: and the kingdom shall not be left to other people, but it shall break in pieces and consume all these kingdoms, and it shall stand for ever. (Dan 2: 44)
I saw in the night visions, and, behold, one like the Son of man came with the clouds of heaven, and came to the Ancient of days, and they brought him near before him. And there was given him dominion, and glory, and a kingdom, that all people, nations, and languages, should serve him: his dominion is an everlasting dominion, which shall not pass away, and his kingdom that which shall not be destroyed. (Dan. 7: 13-14)
Moreover, the book of Daniel states boldly and clearly what we only alluded to earlier, that THE SAINTS OF THE MOST HIGH will inherit the kingdom with the SON OF MAN!
I beheld, and the same horn made war with the saints, and prevailed against them; Until the Ancient of days came, and judgment was given to the saints of the most High; and the time came that the saints possessed the kingdom. . . . But the judgment shall sit, and they shall take away his dominion, to consume and to destroy it unto the end. AND THE KINGDOM AND THE DOMINION, AND THE GREATNESS OF THE KINGDOM UNDER THE WHOLE HEAVEN, SHALL BE GIVEN TO THE PEOPLE OF THE SAINTS OF THE MOST HIGH, whose kingdom is an everlasting kingdom, and all dominions shall serve and obey him. (Dan. 7: 21-22, 26-27)
Notice the New Testament confirmation of this promise of rulership in the kingdom to the saints who endure and overcome; a confirmation given by Jesus himself in the book of Revelation:
And he that overcometh, and keepeth my works unto the end, TO HIM WILL I GIVE POWER OVER THE NATIONS: And he shall rule them with a rod of iron; as the vessels of a potter shall they be broken to shivers: even as I received of my Father. (Rev. 2: 26-27)
And when he had taken the book, the four beasts and four and twenty elders fell down before the Lamb, having every one of them harps, and golden vials full of odours, which are the prayers of saints. And they sung a new song, saying, Thou art worthy to take the book, and to open the seals thereof: for thou wast slain, and hast redeemed us to God by thy blood out of every kindred, and tongue, and people, and nation; AND HAST MADE US UNTO OUR GOD KINGS AND PRIESTS: AND WE SHALL REIGN ON THE EARTH. (Rev. 5: 8-10)
We will not—as many have taught over the centuries—idle away our time in heaven, but will reign on the earth with Christ in a government that will rule all nations in righteousness and justice forever. This is the glorious destiny of the sons and daughters of THE LIVING GOD! Now you understand why it is the Gospel of the KINGDOM OF GOD that was to be preached to all the world for a witness before the end would come . . . now you know the meaning behind the parable of the talents, and the importance of developing your talents to their finest edge . . . and now you know why the Kingdom of God is like a pearl of great price that, when a man finds it, he goes and sells all that he has, if necessary, in order to obtain it! Nothing in this life—all of which will pass away—is of any value at all when compared to it! Jesus even said it would be better to pluck out your eye, if your eye was preventing you from entering the Kingdom of God, than to keep your eye and miss out on eternal life and the glory of ruling with Him in our Father’s kingdom!
And if thine eye offend thee, pluck it out, and cast it from thee: it is better for thee to enter into life with one eye, rather than having two eyes to be cast into hell fire. (Mat. 18: 9)
The re-establishment of the Kingdom of God on earth—a kingdom in which the Lord’s Anointed and all His Saints will rule in peace, justice, and righteousness—is A SURE THING . . . no opponent or force can prevent it. And what a spectacular event the setting up of that kingdom will be!
Behold, the Lord GOD will come with strong hand, AND HIS ARM SHALL RULE FOR HIM: behold, HIS REWARD IS WITH HIM, AND HIS WORK BEFORE HIM. He shall feed his flock like a shepherd: he shall gather the lambs with his arm, and carry them in his bosom, and shall gently lead those that are with young. (Isa. 40: 10-11)
And he shall judge among many people, and rebuke strong nations afar off; and they shall beat their swords into plowshares, and their spears into pruninghooks: nation shall not lift up a sword against nation, neither shall they learn war any more. But they shall sit every man under his vine and under his fig tree; and none shall make them afraid: for THE MOUTH OF THE LORD OF HOSTS HATH SPOKEN IT. (Mic. 4: 3-4) (See also Hos. 1:10; Jer. 23:5; & Dan. 2:44)
This, then, is the GLORIOUS DESTINY of the sons and daughters of the Living God—YOUR DESTINY . . . if you repent, are baptized in the name of Jesus Christ to receive the Holy Spirit and the free gift of God’s righteousness, and accept God’s rule in your heart and mind! You are royalty in the making—if so be that you have the Spirit of Christ—and you were created to “become ye perfect even as your Father in heaven is perfect” and to be ordained as EITHER A KING OR A PRIEST . . . and to RULE WITH HIM FOREVER in His ever-expanding kingdom. This is your destiny, and the reason for which you were born!
Just as every kingdom needs laws that govern civil relationships between citizens, it also needs laws that govern commercial transactions between citizens. It will be no different in the Kingdom of God. This book was written to help you understand the economic principles by which commerce will be governed in the Kingdom of God.
Chapter 1
A Primer on Market Economics
It is a common observation that the needs and wants of people are basically unlimited, while the national resources used to produce or provide such goods and services are very much limited. For this reason, the science of economics is really about the use of these limited resources and their ultimate allocation. In other words: what will be produced, how much of each thing will be produced, and who will ultimately benefit from it? Moreover, how can the limited resources of a nation be utilized with maximum efficiency in order to produce not only the right mix of products, but also the highest overall standard of living? In terms of the size of the pie, if too much of an item is produced the resources used to produce the unwanted excess are wasted, because they can’t be used to produce something else of value. And it is not just the right mix of goods and services an economy produces that is important, but also the distribution of those goods and services among its citizens. In terms of the distribution of the pie, then, how can an economic system provide a reasonable standard of living for all of its citizens, and do so without restricting too much the freedom and wealth of the more successful? The goal of economics is to answer these tough questions.
Economists tend to evaluate the economic well-being of both persons and nations in terms of their material standard of living. But economics is about more that just accumulating “things.” Economics is also concerned about the distribution of assets and income within society, about freedom of choice and the opportunity for all to succeed, and it is also concerned about the quality of the environment and the working conditions of laborers. In short, there is much more to economics than efficient production and maximum output. Many of these concerns we will get to later in this work, but first I will try to give you an overview of just how a market-driven economy works.
Supply, Demand, and How Resources Get Used
Supply, Demand, and Price Determination
The law of supply and demand is a common sense observation that states that scarce goods are priced higher than goods that are plentiful. A good example is the price of corn. In a good year when the harvest is large prices fall to a level that will “clear the market,” or allow all that is available to be purchased. In a bad crop year corn prices will soar as there simply isn’t enough corn to meet the demand of all who want to buy.
In response to pricesthat is, whether they are high or whether they are lowpeople adjust their buying patterns. In the corn example, high corn prices will cause some purchasers to economize and buy less; others who can do so will switch from corn to wheat. So prices attempt to balance supply and demand. In a sense, prices ration the available supply by making it unaffordable to those who either don’t have the cash to pay for it or don’t need it bad enough to pay the higher price. The effect is that supply and demand “balance,” even though not everybody who wanted to buy corn was able to buy all they wanted to, given their available resources. The opposite is true when there is an abundant supply of some product: the price will fall until some people who hadn’t even planned to buy some in the first place will finally do so. Hence supply and demand are balanced by the falling price . . . and the available supply is sold. In other words:
Law of Demand: All else equal, as price falls, the quantity demanded rises, and as price rises, the corresponding quantity demanded falls. In short, there is a negative or inverse relationship between price and quantity demanded. Economists call this inverse relationship the law of demand.
Law of Supply: As price rises, the corresponding quantity supplied rises; as price falls, the quantity supplied falls. This particular relationship is called the law of supply. A supply schedule tells us that firms will produce and offer for sale more of their product at a high price than at a low price. This, again, is basically common sense.345
As the law of supply states, the rising price of an item causes producers to supply more of it to the market. Keep in mind too that the response of supply to increased demand is not always immediate. Sometimes additional supply can be brought to the market quickly simply by increasing the rate of production from current facilities. But at other times, when output is near its productive limit, it could take as long as several years to complete the entire process of designing, building, and bringing on line new facilities. When demand for a particular product does increase, this pressure results partly in an increase in the production of the product, where capacity allows, and partly in an increase in the product’s price:
It is probable that the general level of prices will not rise very much as output increases, so long as there are available efficient unemployed resources of every type. But as soon as output has increased sufficiently to begin to reach the “bottle-necks”, there is likely to be a sharp rise in the prices of certain commodities.6
This type of price increase for a particular product is not an example of overall inflation, but rather of inflation in the price of a particular product relative to the price of other products. It is a signal to producers to increase output. National inflation, in comparison, is an increase in the overall price level for virtually all products. Overall inflation is typically caused by some important barrier to supply, such as the wartime destruction of factories, or by some over-stimulation of demand, such as the aggressive spending in the U.S. for both the Vietnam war and the war on poverty in the 1960s and early 1970s.
Returning to the situation of the response of supply to rising demand, in the real world the long term investments necessary to increase supply are often undertaken before higher prices call for it as businessmen anticipate rising demand, and act in advance so they will be ready to meet it by the time it develops rather than waiting and having to react to it, and in the process losing market share to competitors.
How Prices Determine What’s Available
Given the thousands of products that are produced, purchased, and consumed per year in the average country, the process of deciding how much of each product to produce would seem to be an impossible task. In addition, the amounts needed, or desired, change from year to year making the task seem even more impossible.
In the 1700s poor families in England worked as farmers on estates owned by landlords and as rural craftsmen or domestic workers. From the 1770s this system began to break up under pressure from goods being made in factories. The loss of business forced many rural families to migrate to the cities in search of factory employment. During this time an interesting observation was made concerning the relationship between the price of an object and the “correct” amount of production of that object. It was observed that when higher quantities of a good or service were wanted by society than were available to buy, the scarcity of the item caused its price to rise. Similarly, when too much of a product was produced, or supplied to the market, the price of the item decreased. In the first instance, when not enough was produced, the higher price allocated the short supply to those who wanted it worst, as demonstrated by their willingness to pay a premium price for it. Moreover, the higher price was also a signal to the marketplace that more of the item was demanded, and that it should be produced; indeed, the now higher price made it profitable to do so. In response to this higher price, which implies higher profit to be earned from producing it, the manufacturer now increases production adding to the supply. Rising supply, in turn, helps ease the price. As was explained in the previous section, however, it is not always possible to increase the supply of a product immediately, especially if new production facilities need to be constructed or new machines must be put in service.
When a falling price indicated that too much of an item was available the lower price made production of the item less profitable; this caused a reduction in the amount producers were willing to supply to the market. Hence the price of an itemfreely determined in the marketplace between those who had items to sell and those who wanted to buy themdirected producers to produce either more or less of the item depending on the price they could receive for selling it. This same price also directed buyers to either buy more or less of the item based on how much they had to pay for it. At some quantity of production, or supply, the balance between supply and demand is reached. Clearly it makes no sense for producers to produce items which they could not make a living producing, just as it made no sense for consumers to buy items that were so expensive they had to do without other important things they needed to buy. In other words, the system appeared to be both efficient and self-regulating. To date, no system has been found more effective, or more efficient, at the task of allocating a nation’s scarce resources between the various goods and services that people either need or want than market-determined prices. The equity of such allocation, however, is another matter, and one we will get to in the chapters that follow.
Late in the 18th century a Scottish economist named Adam Smith articulated the theory of the free enterprise economic system based largely on the workings of a freely functioning market which took its direction from independently determined price signals, as explained briefly above. He referred to this “market mechanism” as the invisible hand that directed investment and production as well as buying and selling. The workings of a market are invisible because only its effect could be seen in terms of changing patterns of production and consumption. It is also invisible because it is impersonal; the market for most items is bigger than all its participants, so a price dictated by many suppliers cannot be one person discriminating against another. Such a price must, it was thought, be a fair price, even if individual participants in the market are pursuing their own self-interest:
Every individual endeavors to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security, only his own gain. And he is in this led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.7
How Specialization of Labor Raises Living Standards
One of the primary sources of high living standards is the specialization of labor. Clearly if each of us had to build our own house, grow our own food, weave our own cloth and sew our own clothes, etc, we would not have enough time to get it all done . . . even if we did have the skills to do all of it! On the other hand, if I buy my food from a grocery store, after it has been produced by a farmer and delivered by a distributoreach who specializes in his own activityI have saved valuable time, energy, and expenditure. I can then use my time and resources providing other products that neither the farmer nor the grocer have time to provide for themselves. Personally, I am employed by a developer and manufacturer of medicines for animals. What if each farmer had to earn a degree in medical biology for animals and then develop and manufacture his own supply of medicine for his livestock? He would then have to become trained as a veterinarian in order to diagnose what treatment to give, and so on. I think you can see the point: just as the farmer doesn’t have the time or resources to become a clinical biologist, veterinarian, and manufacturer, none of us have the time and resources to do what we do and still produce for ourselves and our families everything we need.
Specialization of labor allows each of us to use our skills and talents to do something we are good at doing to provide something for society more efficiently than if everyone tried to be totally self-sufficient. In the process, this specialization allows us as a nation to greatly increase our output of goods and services and, in the process, to raise our standard of living significantly above where it would otherwise be. We have done this by maximizing the output that can be obtained from the limited resources we have available. By doing things or providing goods for others more cheaply than they can provide them for themselves we all attain a higher standard of living.
This great increase of the quantity of work, which, in consequence of the division of labour, the same number of people are capable of performing, is owning to three different circumstances; first, to the increase of dexterity in every particular workman; secondly, to the saving of the time which is commonly lost in passing from one species of work to another; and lastly, to the invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many.8
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Three Important Features of the Modern Economy:
Modern advanced industrial technology rests upon the use of vast amounts of capital: elaborate machinery, large-scale factories, and stores and stocks of finished and unfinished materials. “Capitalism” got its name because this capital, or productive “wealth,” is primarily the private property of somebodythe capitalist.
The present day economic system is characterized by an incredibly elaborate degree of specialization and intricate division of labor.
Ours is a system that makes extensive use of money. The flow of money is he lifeblood of our system. It also provides the measuring rod of values. But money can also misbehave when it grows too rapidly and leads to inflation.
(Paul Samuelson & William Nordhaus, Economics, 12th Edition, p. 51.)
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Savings, Capital, and Productivity
As people work and spend their earnings on goods and services, they also save some income for the future, either for retirement or for some unanticipated event or expense. These savings are typically pooled by placing them in a bank or some other depository for safe keeping, from which they are lent out to others for the purpose of investment in “capital equipment” such as machinery and plant facilities. So when a nation foregoes current consumption and uses that portion of its income to produce capital goodsgoods which can then be used to increase output and improve the efficiency of productionit increases the nation’s productivity (usually defined as output per manhour). Capital investment reinforces the productivity gained from specialization of labor and adds further to the amount of output that society can achieve from a given amount of resources. And this capital investment is financed by savings:
Whatever a person saves from his revenue he adds to his capital, and either employs it himself in maintaining an additional number of productive hands, or enables some other person to do so, by lending it to him for an interest, that is, for a share of the profits. As the capital of an individual can be increased only by what he saves from his annual revenue or his annual gains, so the capital of a society, which is the same with that of all the individuals who compose it, can be increased only in the same manner.9
Productivity in an economy is usually referred to as the productivity of labor, even though there are many other inputs in the production process. This is because it is through the application of labor that the other factorsland, machinery, technology, factories, etc.enhance output per hour. A new piece of machinery might enable a worker to produce 50 items an hour where he or she was only producing 25 before; but until labor is applied to the machine, that is, until someone operates it, there is no output! The accompanying table shows that only 33% of the increase in national income in the United States from 1929 to 1997 was due to increases in the amount of labor supplied, while two-thirds of this growth came in the form of increased output per unit of labor applied. This increased productivity was the result of machinery, equipment, new plant, and the technological advances imbedded in that capital. You will notice the factor “economies of scale” contributed 8% of total U.S. economic growth over the period shown in the table. Economies of scale has to do with the cost advantages associated with large size. One clear advantage of size is the spreading of indirect production costssuch as rent, utilities, and managementover a much larger number of products, which brings the cost per unit down considerably. In general, notice McConnell’s explanation of the term:
Economies of scale are production advantages deriving from increased market and firm size. A large corporation often can select more efficient production techniques than can a small scale firm. A large manufacturer of autos can use elaborate assembly lines with computerization and robotics, while smaller producers must settle for less advanced technologies. Markets have increased in scope over time and firms have increased in size, allowing more efficient production methods to be used. Accordingly, U.S. labor productivity has increased and economic growth has occurred.10
Corporate Profits and Their Contribution to the Economy
Often persons have the view that because some corporations oppress labor, destroy the environment, and do other unseemly things, that all corporationsand indeed even the corporate form of organization itselfare evil. This notion easily translates into the idea that corporate profits are evil too, and that they all come undeservedly at the expense of labor. This broad generalization is not true. Just as the laborer receives a wage for his effort and the landlord receives rent for the use of his property, the corporation receives a payment in the form of profit for its contribution to the economy. What does the corporation provide to earn its profit? It provides organization, direction, investment in plant and equipment, and management of the entire enterprise including product design, production, marketing and distribution. Without any of these functions the laborer has neither the direction nor the resources necessary to proceed. This process of organizing and directing business is an important one, and deserves compensation just as the laborers do who use their energy adding value to the product along the way from its initial design to its final delivery. Another important contribution of the corporation for which a profit is earned is that of assuming the risk that the venture will be a success. If things go poorly and the corporation’s income is less than projected, that shortfall comes out of profits first: wages are paid on an “as you go” basis. Firms respond to lower profits by trying to cut costs or change the direction of the business. But whether they succeed or not it is profits that take up the slack . . . either falling when sales are too low or costs are too high, or rising when sales are brisk or costs come in under budget.
. . . the employer who undertakes the whole risks of his business really performs two entirely distinct services on behalf of the community, and requires a twofold ability.
To return to a class of considerations already noticed . . . the manufacturer who makes goods not to meet special orders but for the general market, must, in his first role as merchant and organizer of production, have a thorough knowledge of things in his own trade. He must have the power of forecasting the broad movements of production and consumption, of seeing where there is an opportunity for supplying a new commodity that will meet a real want or improving the plan of producing an old commodity. He must be able to judge cautiously and undertake risks boldly; and he must of course understand the materials and machinery used in his trade.
But secondly in this role of employer he must be a natural leader of men. He must have a power of first choosing his assistants rightly and then trusting them fully; of interesting them in the business and of getting them to trust him, so as to bring out whatever enterprise and power of origination there is in them; while he himself exercises a general control over everything, and preserves order and unity in the main plan of the business.
The abilities required to make an ideal employer are so great and so numerous that very few persons can exhibit them all in a very high degree. Their relative importance however varies with the nature of the industry and the size of the business; and while one employer excels in one set of qualities, another excels in another; scarcely any two owe their success to exactly the same combination of advantages. Some men make their way by the use of none but noble qualities, while others owe their prosperity to qualities in which there is very little that is really admirable except sagacity and strength of purpose.11
As it was 100 years ago, so it is today! Some employers operate with “noble qualities,” while others exhibit “few admirable qualities.” Corporations run by men of character and integrity don’t knowingly commit offenses and evils, and the profits of such corporations typically are not tainted with oppression or evil acts. In other words, the problem is not corporations per se, but rather the misuse of corporate power and resources by men of questionable character. More specifically, the primary problems with corporations are two: first, because of a wide dispersion of ownership their owners (shareholders) are unable to have an effective say in what corporate management does, therefore no one is really responsible to society for their actions. Second, much of what modern corporations (both national and multinational) do that is harmful and oppressive is actually legal, which makes the economic laws of most countries the real culprit. We will look further into these important problems of corporate structure and responsibility, as well as the economic laws that allow them to do much that is harmful, in the chapters that follow.
Before we leave this section, however, it will be useful to mention another very important function of profits in an economy. That function is the allocation of resources. As we mentioned earlier in this chapter, rising prices signal an increased opportunity to earn profit while falling prices signal just the opposite. The changing level of profits in any industry is typically a clear signal to either increase (or decrease) the amount of resources allocated to the production and distribution of that particular product. Indeed, if expected profits are high enough, new producers for the product in question will appear, just as they will disappear if profits fall too far. The reaction of businesses to these crucial signals helps to reduce the number of instances where a country ends up producing too many of some products people either need or want while at the same time producing too few of others. This method of individuals reacting freely, at their own risk, to market-based signals to provide either more or less of the products society wants appears to be the most efficientthough not necessarily the most equitableway yet discovered of allocating a country’s scarce resources.
Foreign Trade and the Law of Comparative Advantage
Just as people compete in a market-based economy to provide quality products at prices that are competitive, so too there is competition between countries. Think of international trade in goods and services as an extension of the specialization of labor. Similar to individuals having strengths and weaknesses from which they contribute the best way they can to maximize their own output, and thereby society’s, nations also have strengths and weaknesses based primarily on natural resources. For example, many Arab nations are rich in oil reserves but have little in the way of fertile land on which to grow food. It makes sense for them, therefore, to spend more time and effort producing oil and selling it to other nations for money with which they can buy food from nations with more fertile ground, such as the United States, where it can be produced cheaper. Many Central and South American countries have climates more suitable to growing coffee, sugar, and cocoa than do many of the large nations consuming these products, so it makes sense for them to concentrate more energy and resources on the activity of
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How NOT to Raise the Standard of Living
of the Disadvantaged:
Saipan
With promises of high pay and quality work in the U.S., workers agree to recruitment fees from $2,000 to $7,000. They often must sign “shadow contracts” waiving basic human rights, including the freedom to join unions, attend religious services, quit or marry. Pregnant garment workers on Saipan (a U.S. Commonwealth) are forced to have abortions to keep their jobs. In 1992, the U.S. Department of Labor filed suit against five garment factories . . . Employees were forced to work 84 hours per week without overtime pay, wages were paid below the already-low minimum wage, and employees were locked in their worksites and living barracks.
Haiti
Every morning Haitian factory workers wake up with the sun only to look forward to a long day of horrid conditions. Women can expect to be sexually mistreated by their supervisors, and no one can expect to be paid more than twenty cents an hour. There are no bathrooms, no clean drinking water, no health benefits, and no sick days. The workers make athletic products for Wilson, Worth, Star Sports, the U.S. Government and others.
Mexico
The people who live in Lucio Blanco or Zarogoza or the other squatter villages actually work for some of America’s premier companiesGeneral Electric, Ford, GM, GTE Sylvania, RCA, Westinghouse, Honeywell and many others. They are paid as little as fifty-five cents an hour. No one can live on such wages, not even in Mexico. With the noblesse oblige of the feudal padrone, some U.S. companies dole out occasional despensa for their struggling employeesrations of flour, beans, rice, oil, sugar, saltin lieu of a living wage.
In spite of new auto manufacturing jobs, incomes are not rising in Juarez, in terms of purchasing power. They have been falling drastically for years. These workers can barely buy the necessities of life. Daniel Fortino works for General Electric at a plant making capacitors, as does his wife. “Young people generally leave after a few months or a year because the salary is so low, they can’t make it,” he explained. Workers in the maquiladora zone don’t agethey leave. Because of the intensive work it entails, there’s constant burnout. If they’ve been there three or four years, workers lose efficiency. They begin to have problems with eyesight. They begin to have allergies and kidney problems.
In Brownsville, Texas, just across the border from Matamoros, a maquiladora town, babies are being born without brains in record numbers; public health officials in the area believe there is a link between anencephaly (the name of this horrendous birth defect) and exposure of pregnant women to certain toxic chemicals dumped in steams and on the ground in the maquiladoras across the border.12
California
While retailers and brand-name manufacturers reap enormous profits, the workersprimarily immigrants and womenwho sew the garments must often work 60 to 70 hours a week just to earn wages that are at or below poverty levels. A 1998 federal Department of Labor survey found that 61 percent of Los Angeles garment factories violated minimum wage and overtime compensation laws. Earlier surveys found that 90 percent of sewing shops did not comply with health and safety laws, and more than half have serious violations that could lead to severe injuries or death.
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growing and distributing these commodities. France is blessed not only with fertile farm land, but with land that is perfect for producing fine wine; South Africa has large deposits of gold; Australia has abundant land resources for producing wheat, wool and meat, etc. The idea is that if one country can produce a product by using fewer national resources than another country does to produce the same product, then it raises everyone’s standard of living for the more efficient country to specialize in that product and export it to other countries. In return, the exporting country should buy from other countries those things which it cannot produce for itself quite as efficiently. By specializing in this way each nation employs its limited resources more efficiently and, in the process, raises not only its standard of living but that of its trading partners as well. This type of national advantage is referred to as “comparative advantage.” Stated more succinctly:
If each country specializes in the products in which it has comparative advantage (or greatest relative efficiency), trade will be mutually beneficial. Real wages and incomes will rise in both countries. And these statements are true whether or not one of the regions is absolutely more efficient than the other in the production of every good. 13
True comparative advantage is based on efficiency in the quantity of inputs to production, not on lower money cost per unit. This is an important distinction: When trade between nations is based on true comparative advantage both nations benefit from the transaction because the same amount of labor produces more goods and services. When comparative advantage is not the underlying basis of trade between nations (as it often isn’t in today’s era of downsizing and restructuring) but rather lower wage costs in money terms is, then total global purchasing power is usually reduced as laid off workers in the high wage country end up taking jobs which pay considerably less than the jobs the market forced them to give up. In this situation benefits don’t normally accrue to both countries participating in the trade because the total labor expended on the traded goods is often the same, or more, than the amount expended before the trade. As a result, global labor’s income is, in total, reduced, with the amount of the reduction accruing to the investors of the corporation that built the new facility and achieved the lower cost advantage. Moreover, if oppressive labor tactics or damaging environmental policies are pursued in the low wage country, it is quite possible that neither country benefits from the trade . . . or even that both countries lose. Have no illusions that free trade among nations is really prompted by the altruistic goal of maximizing global output and raising the standard of living in poor nations: it is about higher profits for investors of capital:
When capital is confined within the national borders of trading partners, it must flow to those industries in which its country of origin has a comparative advantage. When the economies are merged, capital can flow to whatever localities offer the maximum opportunity to externalize costs. The basic consequence is to shift income from workers to investors and to shift costs from investors to the community.14