Note: This article is part of the ‘Principles Project,’ a list of principles, axioms, and beliefs that undergird a Christian view of economics, liberty, and virtue. Click here to read the introduction and other posts in this series.
The Principle: #9B – Wealth is created when human beings creatively transform matter into resources. Because human beings can create wealth, economic exchange need not be a zero-sum game. (NB: This is a subset of the Acton Core Principle of Creation of Wealth)
The Definitions: This principle has five key terms that need to be clearly defined:
Resources — Things of value we can use when we need them to accomplish an activity.
Wealth — Access to or control over an abundance of valuable resources.
Zero-sum game — In a zero-sum game, one person’s gain (or loss) is exactly balanced by the losses (or gains) of the other participants. If the total gains of the participants are added up, and the total losses are subtracted, they will sum to zero. It’s similar to dividing a pie between five people: someone can only get a larger slice if someone else’s portion is smaller.
Economics — Can be defined as the science of purposeful individual action in an attempt to satisfy an unlimited number of wants with a limited set of means.
Free Enterprise — An economic system in which private business operates in competition and largely free of state control.
The Explanation:
The first axiom of Christian economics is found in Psalm 24:1: “The earth is the Lord’s, and everything in it, the world, and all who live in it.” Because God owns everything in Creation—including us—we are never more than mere managers or stewards of his resources (see Principle #1). Wealth is therefore the accumulation of resources that God allows individuals or groups of people to manage on his behalf.
Since humans have an unlimited number of wants with a limited set of means, many people assume that wealth accumulation artificially restricts the resources available for communal human flourishing. This is why many people believe that wealth, like a pie, is fixed and that “there must be one winner and one loser; for every gain there is a loss.”
They are not completely wrong, for there are some economic systems (such as socialism), where economics is indeed a zero-sum game. But this is not necessarily true for a system of free enterprise.
Jay W. Richards explains why free enterprise does not require that there be an economic loser for every economic winner:
One reason people believe this myth is because they misunderstand how economic value is determined. Economic thinkers with views as diverse as Adam Smith and Karl Marx believed economic value was determined by the labor theory of value. This theory stipulates that the cost to produce an object determines its economic value.
According to this theory, if you build a house that costs you $500,000 to build, that house is worth $500,000.
But what if no one can or wants to buy the house? Then what is it worth? Medieval church scholars put forth a very different theory, one derived from human nature: economic value is in the eye of the beholder. The economic value of an object is determined by how much someone is willing to give up to get that object. This is the subjective theory of value.
As Richards goes on to explains, to say “economic value is subjective” is not to say “everything is relative.” Economic value is not ultimate value. Your ultimate value in the eyes of God is not the same as economic value. What is subjective, as Christian scholars discovered in the Middle Ages, is that the pleasure that people derive from different goods is subjective and arises from variability of human opinion, so that different people esteem goods differently.
To understand what this means, let’s return to Richard’s example of the $500,000 house:
As the developer of the house, you hire workers to build the house. You then sell it for more than $500,000. According to the labor theory of value, you have taken more than the good is actually worth. You’ve exploited the buyer and your workers by taking this surplus value. You win, they lose.
Yet this situation looks different according to the subjective theory of value. Here, everybody wins. You market and sell the house for more than it cost to produce, but not more than customers will freely pay. The buyer is not forced to pay a cost he doesn’t agree to. You are rewarded for your entrepreneurial effort. Your workers benefit, because you paid them the wages they agreed to when you hired them.
The developer of the house took various material resources (e.g., wood, iron, stone) and arranged them in a form (i.e., a house) that had more subjective value than the individual materials had before. By increasing the value, the developer created wealth that benefited a number of people involved in the economic transaction.
Humans, of course, are sinful, which means it’s always possible for wealth to be accumulated and used in a way that is unjust and that harms the community. But in general, wealth creation is beneficial to more than just the people who are to act as its stewards.
This tendency to create mutually beneficial situations is the primary reason we should champion free enterprise. Free enterprise is preferred not because it guarantees everyone wins in every competition, but rather, as Richards notes, because it allows many more win-win encounters than any other alternative economic system.
