Ritenour at the Center for Political and Economic Thought

Last month I was blessed to lecture at the Center for Political and Economic Thought at Saint Vincent College. The very good people at the Center were kind and encouraging and the students were engaging. My thanks to Mary Beth McConahey and Zachary Davis for the invitation and hospitality. I had a great time.

My lecture entitled "Do God and Economic Science Mix?" explained the biblical foundations of economics, discussed the economics of prosperity, and shed some light on the Christian ethic of property and its implications for economic policy. You can watch the lecture here:

Whither the Population Bomb?

Fascinating retrospective of "The Unrealized Horrors of the Population Bomb" at the New York Times. 


The money quote from Gita Sen, development economist at the Centre for Public Policy, Indian Institute for Management in Bangalore:

"I know Paul Ehrlich reasonably well and I respect him as a biologist. I don't and never have, and he knows it, agree with his views on population. It's a tendency to apply to human beings the same sort of models that may apply for the insect world. The difference, of course, is that human beings are conscious beings and we do all kinds of things to change our destiny."

Christian Professors Weigh in on Markets, Justice, and Exploitation

On September 5, Christianity Today published an article by Dr. Kevin Brown, seeking to examine the relationship between capitalism and the common good. Brown is assistant professor at the Howard Dayton School of Business at Asbury University and in his essay he chastises the Institute for Faith Work and Economics' video, I Smartphone as a too simplistic, pro-capitalist work that tempts us to "deify the market."The Institute subsequently asked six professors from various disciplines to comment on the question whether markets, within a biblical framework, lessen exploitation. I was one of the professors asked to share my thoughts and they are included in this blog post.

Obviously, a single blog post is not nearly enough to do justice to the question, however some points are clear enough. I wrote:

The market is a network of voluntary exchange. Nothing more, nothing less. It is not the arbiter of truth and beauty, but it is a marvelous institution nonetheless, because the market price system allows for the coordination of a vast, complex market division of labor that increases the productivity, income, wealth, and standard of living of everyone who participates.

This even includes those employed in harsh working environments at what most Americans would think of as unacceptably low pay. We should note, however, that what most people see as labor exploitation is, in fact, people choosing work under such conditions because it is their best alternative.

Of course Christ calls us to be responsible market participants. However, responsibility includes not harming others in the name of good intentions. We do not help the most vulnerable of our society by taking away their best alternatives.

I encourage you to read the entire post that features insights from five economists and an associate professor of New Testament studies.

Three Reasons Private Property Is Essential for Human Flourishing

In his Elements of Moral Science, published in 1835, Baptist minister and college president Francis Wayland cogently identified the positive link between private property and human flourishing.

He describes it in elegant prose:

Just in proportion as the right of property is held inviolate, just in that proportion civilization advances, and the comforts and conveniences of life multiply. Hence it is, that, in free and well-ordered governments, and specially during peace, property accumulates, all the orders of society enjoy the blessings of competence, the arts flourish, science advances, and men begin to form some conception of the happiness of which the present system is capable.

Economic theory teaches that Wayland was speaking truth. The right to property is absolutely essential for human flourishing, for it is the social institution necessary for the engines of economic prosperity to function.

Read the rest of the article

Why Entrepreneurship Is Essential for Economic Development

Since our banishment from the Garden of Eden, man has faced a central cultural dilemma: how do we fulfill God’s creation mandate in a world of aggravated scarcity without either starving to death or killing one another?

This is not at all a moot point.

Whether they know it or not, different societies seek to answer this question with every change of economic institutions and policies. History is full of stark examples revealing that different attempts to solve our dilemma have resulted in widely different consequences.

Key Components of Economic Development

Economic theory rooted in an understanding of man as a purposeful actor created in God’s image teaches that to materially fulfill God’s cultural mandate, we must take advantage of the division of labor, capital accumulation, and entrepreneurship.

• Division of labor opens the door to increased productivity by allowing people to specialize at lines of production where they are most efficient.

• Capital formation also contributes to economic progress by increasing the productivity of the user. Likewise, with more capital investment comes better technology that will further increase productivity.

In order for economic progress to continue over time, however, it is important not to waste capital that has already been accumulated. This is why entrepreneurship is the third major contributor to economic development. 

Read the Rest of the Article

Is Capital a Blessing or Curse?

“Capital is opposed to labor, and the rich get richer while the poor get poorer” is a phrase heard all too often.

It’s often repeated by those who misunderstand the true economic relationship between capital formation and the productivity and real income of workers.

• I have previously written about how our understanding of the causes of economic progress can assist human flourishing and our fulfilling the cultural mandate.
• I later explained the nature and beneficial consequences of division of labor and how voluntary exchange is necessary for the division of labor to thrive.

Something often forgotten, however, is that a highly developed division of labor would be impossible without capital formation—another engine of economic development.

What is Capital, and Why Does It Matter?

Capital goods are produced means of production: tools, machines, buildings, and intermediary goods.

What we call capital is merely the sum of the monetary value of all a firm’s assets that are dedicated to that firm’s productive operations minus the sum of the monetary value of all of a firm’s liabilities. These assets may consist of land, physical plant, tools, machinery, goods-in-process, receivables, cash, etc.

Therefore, capital formation should be no more suspect than any other economic activity. Fulfilling the cultural mandate in our fallen world without either starving to death or killing one another requires productive labor. Sustaining a growing population requires increases in productivity.

This is why capital is a blessing.

Read the rest here

How Come We're So Rich?

That is the question Gary North sought to answer presenting this year's Lou Church Memorial Lecture on Religion and Economics at the 2013 Austrian Economics Research Conference. He hypothesizes that the cause of the industrial revolution was three fold: a change in ethics that began to see commercial activity in a positive light, an optimistic, post-millennial eschatology, and a Smithian link between self-interest and productively serving other people.

Government Spending vs. Entrepreneurial Investment

Last month, I lectured in the Freedom Readers series for Grove City College's Center for Vision and Values. My lecture was entitled Government Spending Versus Entrepreneurial Investment and was based on an op-ed of mine that was published at Forbes.com last summer. The lecture was promoted with the following text: "Bow ties are cool. Capitalism is cool. Bow ties and capitalism are doubly cool."

My main point was that if we want to promote economic prosperity, entrepreneurial investment is vastly superior to government spending because government bureaucrats have neither the expertise nor the incentive to spend money productively while entrepreneurs do. You can watch the entire lecture along with questions and answers by clicking here. My lecture begin at the 6:34 mark, but to understand my opening remarks, you most likely will want to watch the introductions as well.

Labor Day

On Labor Day two years ago, I asked the question, "Why not Capital Day?" The question is still a good one--increasingly so given that it appears that capital accumulation has slowed significantly since 2008.

As I explain in my book, Foundations of Economics, capital accumulation is one of the chief sources of economic expansion and development. We can't fulfill the cultural mandate without it.

Fruitful Dominion

My article, "Fruitful Dominion: Genesis 1 and the Free Economy" has been published in the most recent issue of The Journal of Faith and the Academy. The electronic copy of this issue will not be available on-line for awhile, but you can subscribe to the print edition by clicking here. My paper is an edited version of the lecture I gave at the 2012 Faith and the Academy Conference hosted by Faulkner University. Below are page images of the journal cover and the first page of my article.

The Importance of Markets in the Development of the West

During our annual summer trip to visit our children’s grandparents, my wife, children and I attended a family reunion in the Sandhills of Nebraska. Afterward we did something I have wanted to

Chiney Rock, Western Nebraka

do for many years. We traveled farther west to see the most distinctive natural landmark on the old Oregon Trail— Chimney Rock. Upon viewing this magnificent geological formation, I was, among other things, provoked to investigate personal accounts of the landmark from Oregon Trail travelers. I discovered a fascinating work by Ezra Meeker, The Ox Team or the Old Oregon Trail 1852-1906. It was a book published in 1906 Meeker wrote to commemorate “Pioneers who fought the battle of peace and wrested Oregon from British rule.”

Meeker provides a firsthand record of his journey from Iowa to the West along the Oregon Trail in 1852. I found that the book contains several passages that illuminate several important economic principles. One of which is the importance of the

               Ezra Meeker (1830 - 1928)

market, that vast network of voluntary exchange, for the development of the division of labor and, hence, society.

Ezra Meeker was born and raised near Indianapolis, Indiana. Soon after he was married, he and his wife decided to move west to Eddyville, Iowa, with the intention of developing their own farm on their own land. They thought their first Iowa winter weather harsh and unpleasant. They also found that, although the soil rich for farming, there were no transportation networks, linking them to markets. Meeker writes,

The country was a wide open, rolling prairie, a beautiful country indeed, —but what about a market? No railroads, no wagon roads, no cities, no meeting-houses, no schools; the prospect looked drear. (The Ox Trail, p. 21)

Note that among other challenges, Meeker cited a lack of markets as a primary reason for moving on. Without access to markets, they simply could not make a living farming. It was this final evaluation of their situation which prompted Meeker and his bride, plus a new infant, to proceed west along theOregon Trail the following year.

Meeker's actions illustrate exactly what Ludwig von Mises meant when he referred to the division of labor as the “fundamental social phenomenon.” It is so, because the division of labor is the reason why communities form. People move to different locales and specialize in different vocations, because it is beneficial to do so. With no way to bring agricultural products to market, Ezra Meeker and others would merely be wasting precious resources attempting to farm at that time and place in Iowa. Anyone who rejects the importance of the division of labor and markets rooted in voluntary exchange, fail to understand the history of the development of our nation.

Reductions in State and Local Government Spending is a Good Thing!

Being published by the New York Fed, Liberty Street Economics, is ironically titled. The people there argue that reductions in spending by state and local governments are holding back the economy. They use the following chart to illustrate their point that state and local goverment spending has tanked, causing a draw on the economy.

Think again, I say. While it is true that, because government spending is a component of Gross Domestic Product, when states and municipalities spend less, GDP could decrease, in the long run, less government spending is a good thing, provided we wish to return to prosperity.

The government does not produce anything. Its income must be taxed from it citizens. As such, government spending is consumption. The more we consume as a society, the less we save and invest. With less investment comes lower per capita capital over time and less prosperity. Do not be led astray by GDP. The less government spending, the better.

Money, Morals, and Missions

Today I am very honored to be presenting one of the plenary lectures at the 2012 Faith and the Academy Conference. This year's theme is Money, Morals, and Missions. My lecture is entitled "Fruitful Dominion: Genesis 1 and the Free Society," and draws upon themes in my book, Foundations of Economics: A Christian View.

My main thesis is that fulfilling the material aspect of the cultural mandate found in the first chapters of Genesis requires economic development, which requires taking advantage of the division of labor, capital accumulation, and entrepreneurship. These engines of prosperity, in turn, require private property, which is why a free society is conducive to our fulfilling the cultural mandate.

My friend and department chair, Jeffrey Herbener, is also presenting remarks entitled, "The Ethics of Money Production: The Fed, Wall Street, and Sound Money." The full range of speakers and talks sounds very inviting.

George Ayittey on the Cheetah Generation

George Ayittey on the Cheetah Generation vs. the Hippo Generation. From PovertyCure:



George Ayittey is an economist from Ghana and professor at American University. He is the author of Africa Unchained. 

Engines of Prosperity: Is There a Single Cause of Economic Expansion and Development?

Economic theory teaches that there are three contributing factors to economic expansion and development: the market division of labor, capital accumulation, and entrepreneurship. From time to time, however, different economists have sought to emphasize one of these three engines of prosperity over against the others in explaining economic progress.

Adam Smith, for example, placed great emphasis on the division of labor as the cause of national wealth. The classic Harrod-Domar model focuses exclusively on capital investment, while the Solow growth model uses a neo-classical production function to conclude that the important contributor to sustained economic progress is technology. This conclusion heavily influences the thought of William Easterly in his book The Elusive Quest for Growth. 

It turns out, however, that we cannot neatly sever the components responsible for economic expansion from one another and find a single cause that explains economic progress. Certainly the division of labor has been a great boon to productivity and the standard of living. However, a highly developed division of labor would be impossible without the accumulation and use of capital goods.

Likewise, entrepreneurial activity presupposes an already existing division of labor and stock of capital to which entrepreneurs have access. As Rothbard and Salerno have noted, the entrepreneur must invest real property in the production process and if he errors in his market forecast, he can indeed reap large losses.

At the same time, we should never forget that capital per se never guarantees economic progress either, because it must be wisely utilized. One thing that will surely quickly shrink the capital stock is for it to be invested in wasteful production projects. Economic expansion and development is the result of all the contributors working together. It is the blessed result of a highly developed division of labor, taking advantage of a growing capital stock productively invested by entrepreneurs.

Engines of Prosperity: Entrepreneurship

A couple of weeks ago, I began a series explaining what economics teaches us about the causes of prosperity (see here, here, and here). Because capital accumulation increases productivity of land and labor, the size of the capital stock is positively related to economic expansion. In order for economic progress to continue over time, however, it is important not to waste capital that has already been accumulated. Capital must not be consumed by being sunk in unproductive uses. This is why entrepreneurship is the third major contributor to economic development.

If the capital stock is unwisely employed, it will shrink over time, resulting in a decline in the standard of living. Merely because a capitalist sits on a pile of capital that he is ready to invest does not guarantee that he will have an equivalent or larger pile of capital to invest a year from now. He could invest his present capital to produce goods that are unwanted and fail to reap enough revenue to maintain his capital stock.

Capital accumulation, per se, does not guarantee success in any business venture. As Austrian economist Ludwig von Mises explained in Human Action (p. 295),

Capital does not ‘beget profit’. Profit and loss are entirely determined by the success or failure of the entrepreneur to adjust production to the demand of the consumers. 

Capital is accumulated out of savings. Savings is income held back from consumption. If income declines, then savings declines, if there is not an accompanying decrease in time preference (and there is no reason to think that there would be merely due to economic losses).

Capital accumulation over time, therefore, also depends upon the wise use of capital. Waste is possible, because production decisions in the present are based on a forecast of uncertain future market conditions. If the producer forecasts incorrectly, he will use his capital to make something people do not want and he will not be able to sell his output at prices he anticipated would cover his costs. His income falls and his capital is consumed. Successful entrepreneurship is needed to reap profits that are the result of the wise use of capital.

Entrepreneurship is necessary because in the market division of labor people produce goods more for the market than directly for themselves. As my friend Jeff Herbener notes, they must therefore forecast the subjective values of other people. The entrepreneur performs the valuable social function of dealing with uncertainty, coordinating diverse land, labor, and capital goods owned by numerous people, and directing production into the most socially valuable ends. A society that wants to flourish economically, must embrace social and legal institutions that allow entrepreneurs to perform their function.

Auction of Apple-1 Computer Teaches Two Economic Lessons

This Tuesday, an original Apple-1 Computer sold at auction at Christie's of London for $213,600. The original 1976 sticker price for the computer when it was first released was $666.66. This recent sale illustrates two important economic lessons.

The first lesson is that value is subjective. People value goods according the the ends those goods satisfy. When acting, because economic goods are scarce, a person must rank his ends, choosing to obtain some while leaving others unfulfilled. This ranking is done by a process of subjective, or personal, valuation. As explained by Carl Menger in his Principles of Economics , it is this subjective value that determines the price of a good. Menger's theory that is derived from the reality of human action is in stark contrast with Karl Marx's labor theory of value and even Alfred Marshall cost of production theory of value. With an original price tag of $666.66, we know that the original cost of production was something less than that. It surely was not $213, 600. The reason the selling price for the Apple-1 was that high is that someone subjectively valued that particular computer more than $213,600. Value is subjective and the prices of goods are determined by the subjective valuations of all buyers and sellers in the market.

The second thing we learn from the story of the computer sale is that free enterprise, capital investment, and entrepreneurial drive result in economic development. The story about the Apple-1 auction reports that in today's dollars, $666.66, the original purchase price, is approximately equivalent to $2593.96 today. Spending that much money will buy you three top of the line iPads. It could also buy a personal computer that can do vastly more that the creators of Apple-1 (with its 8K bytes of RAM) ever dreamed a computer could do.

The Importance of Capital

Yesterday, I began a series of posts that will briefly explain the economic sources of prosperity. I discussed the nature and beneficial consequences of the market division of labor and how voluntary exchange is necessary for the division of labor to thrive. (By the way, an outstanding article on the topic is Murray Rothbard's masterful, "Freedom, Inequality, Primitivism, and the Division of Labor.")

A highly developed division of labor would be impossible, however, without capital goods. Another engine of economic development, therefore, is capital. Capital goods are produced means of production: tools, machines, buildings, and intermediary goods.Capital is the sum of the monetary value of all a firm’s assets that are dedicated to that firm’s productive operations minus the sum of the monetary value of all of a firm’s liabilities . These assets may consist of land, physical plant, tools, machinery, goods-in-process, receivables, cash, etc.

The use of capital goods increases the productivity of the user, by allowing people to produce a greater quantity of output in the future. They also enable people to produce some goods that could not be had at all without capital goods, such as watches, automobiles, or iPads.

However, capital goods do not spontaneously spring fully developed from nature. Before capital goods can be used, they must be produced. Producing them takes time. In order to obtain capital goods it is necessary to save and invest these saved resources toward the formation of capital.

Additionally, because capital goods are perishable, they must be replaced with further investment. At any moment in time, therefore, each producer has the option of accumulating capital, maintaining capital, or consuming capital. Accumulating and maintaining capital requires a certain amount of saving. Consuming capital requires only that the producer use up his capital stock. As implied above, the choice regarding whether a producer is going to accumulate, maintain, or consume his capital depends upon how much that producer values present goods over future goods. It depends on his time preference.

The higher people’s time preferences are, the more present-oriented they are. They tend to consume more and save and invest less. With high enough time preferences they will consume capital, resulting in less productive labor. Output and real incomes will fall and society endures a lower standard of living.

The lower people’s time preferences are, the more they save and invest. Over time, people will have more capital goods and labor will be more productive. Output will increase and the general standard of living rises. Consequently, a chief determinant of whether an economy expands or contracts is the size of the stock of capital.

If we want a society that enjoys increased prosperity, therefore, we need to foster social institutions that encourage capital accumulation. Such an institution is private property. Unless an investor is secure in his property, he will remain uncertain whether he will be able to keep both his accumulated capital and any positive return on his investment. He will have little incentive to save and invest in further capital maintenance not to mention accumulation. Private property, the institutional setting of capitalism, is therefore a key that opens the door to prosperity. As Mises says in Human Action (p. 562):

The characteristic mark of economic history under capitalism is unceasing economic progress, a steady increase in the quantity of capital goods available, and a continuous trend toward an improvement in the general standard of living.

Engines of Prosperity: The Division of Labor

Much has been written recently on the efficacy of foreign aid for economic development. Before we can make sense whether foreign aid is affective in assisting less developed countries experience sustainable economic development, we need to understand what are the sources of prosperity to begin with. Only after we grasp what causes prosperity can we then evaluate whether foreign aid assists, hinders, or has no impact on the process of economic expansion and development.

Even before we do that, however, it is helpful to remind ourselves that for the bulk of human history, poverty was the norm for the masses. Mass prosperity is a relatively recent phenomenon. Therefore before we ask why some societies are poor, we should investigate why any societies are prosperous.

As I explain in the culminating chapter of Foundations of Economics, economic theory has much to tell us about how societies become prosperous. Economics identifies three sources of economic progress: the division of labor, capital accumulation, and entrepreneurship. Today I want to focus on the division of labor. It is so important that in Human Action (p. 157), Ludwig von Mises referred to the division of labor and the human cooperation inherent to it as “the fundamental social phenomenon.” The division of labor is socially fundamental in two senses. It has been with us since the beginning of human history and it is the driving force for the forming of societies. In the book of Ezekiel, for example we find a list of 37 different goods that were brought to the commercial center Tyre from 23 different cities or regions.

The division of labor contributes to prosperity, because people are more productive when they specialize in doing those tasks at which they are relatively most efficient. Instead of every person producing every good that he consumes himself, all of us are more productive if we specialize in producing those goods for which we are the low cost producer. This division of labor results in more total output and more goods available for society to consume using the same quantity of resources.

There are many reasons for this. God has created mankind with unequal abilities in human labors. He has also providentially distributed natural resources unequally over the earth. Capital goods are also unequally distributed. Different people have different quantities and kinds of tools, buildings, and machines with which to work. Because different people possess different human abilities, natural resources, and capital goods, they tend to be relatively more productive at certain tasks and relatively less productive at other tasks. These differences and the ability to produce more in certain lines of production create an incentive to specialize in production.

Given the differences in labor abilities resource and capital goods endowments, people find it in their interest to specialize in making those goods at which they are relatively better at producing. As everyone specializes in producing goods they can make at the lowest cost compared to anyone else, the total output of all members of society increases. As people exchange their output with others who have participated in the division of labor, they are also able to consume more than they could without the division of labor.

We can only benefit from the division of labor, however, if we can exchange what we produce. Voluntary exchange is necessary to open the door to the division of labor, because only the possibility for exchange allows us to produce goods for the market and not for merely our own use. If no exchange took place, everything each of us wants to consume would have to be made personally. By allowing for the development of the division of labor, exchange helps bring about economic progress, which allows for an increasing number of people to have dominion over the earth, not by killing or robbing one another, but by peaceful, mutually beneficial voluntary trade.

Economic Expansion and Development: To What Extent a Mystery?

William Easterly has a noteworthy post on his excellent blog Aid Watch in which he links to a New York Times article arguing that "Development is an unpredictable business." Consequently policies that seemed to work in one time and place did not work in others. The author the the Times piece notes:

For all its temptations, however, the search for a policy toolkit toward development is fraught with pitfalls. Over the last 60 years or so, the international development community has come up with model after model, theory after theory, in search of just such a toolkit.

While it is certainly true that one state plan after another has failed, Easterly is also right to warn that, when analyzing economic policy as it relates to economic development, we don't want to ignore fundamental economic principles merely because of a seeming lack of rhyme and reason.

As I explain in the last chapter of Foundations of Economics, economic theory has a lot to teach us about the engines of prosperity. Sustained economic expansion and development is the result of increased productivity. To achieve increases in productivity, we need to take advantage of the market division of labor, capital accumulation, and wise entrepreneurship. Such activity requires an institutional framework of private property. Economic law, consequently, constrains us from achieving lasting prosperity through state intervention and central planning.

The tricky thing about economic development, however, is that even an environment of private property will not guarantee economic development. In a free society people are not forced to save and invest in capital accumulation or to undertake entrepreneurial activity. Private property only allows for the operation of the engines of prosperity; it does not guarantee that they will operate. Whether they do so ultimately will be decided by people acting on their subjective preferences. 

That explains the mystery. The very freedom required for economic development also allows for the possibility that economies will not develop. Different people may act differently in the same institutional environment. Changing the rules will not necessarily change outcomes exactly like we want. What economic expansion and development requires is not that mysterious. The uncertainty that remains stems from personal values.