Lecture 10: Economics
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Two basic concepts of economics are limited resources and the choices we make that reflect our values.
The Christian Worldview and Economics
I. What is Economics?
A. Definition - The study of human action.
B. What is human action?
II. Two Basic Concepts of Economics
A. Scarcity (limited resources)
B. Choice (our choices reflect our values)
III. Five Important Principles of Economics
A. A person's choices reflect their scale of values.
B. We know what ranks at the top by observing choices.
C. Economic value is always subjective.
D. Economic cost is also subjective.
E. Opportunity cost is what you give up in order to choose your highest ranked option.
Course: Advanced Worldview Analysis
What is economics? That's the first question. Economics is the study of human action. Parenthesis. How many people will know enough to define Economics. Notice, there isn’t anywhere in this definition, any mention of money. Any mention of banks. Any mention of a stock market. It simply says that economics is the study of human action. Let me tell you something very important here. If you understand basic principles of economics that I’m going to share with you over the next couple of hours, you will know more about what makes human beings tick. Psychologically, you could learn that from an entire 2 semester course in psychology. Economics is really the study of what makes human beings tick, what makes them make the choices and decisions in life that they make. And money is somewhat peripheral to this whole business. Now after I define economics as the study of human action, then there comes obviously another question. What is human action? And here's my explanation. Human action is purposeful, goal directed, intentional human behavior. Now probably there is some redundancy here because purposeful, goal directed, intentional all mean basically the same thing but I'm trying to make a point. This is not unintentional behavior. You want to stop me anytime, shout 'Amen' and just raise your hand. Now here's an example. Your decision to dine at an Italian restaurant is an instance of human action. Because you could have gone, you could have stayed at home. Like this afternoon, I made myself a toasted cheese sandwich. But considering some of the restaurants in this area, that wasn't a bad choice. Your decision to dine at an Italian restaurant is an instance of human action. But what your digestive system does with the food you eat is not an instance of human action. What your body does in your stomach, your small intestines, your large intestines, do you want me to draw a picture, that is not a result of any conscious choice or decision. You cannot say at this particular moment- 'Colon, stop!' You can't. Your colon doesn’t respond to choices. So does that help you understand what human action is? The opposite of what is happening in your colon right now. What are the 2 basic concepts of economics? Answer- Scarcity and Choice. Do you realize we are now on the 3rd overhead and the word money has not yet appeared! Scarcity and Choice, now that requires some explanation. Life confronts us with scarcity. Scarcity is a fact of life. I don't think that's original with me. Scarcity is an unavoidable feature of life. We can never get everything we want. Put that down and give me credit. There is no such thing as a free lunch. Put that down and give me credit. If these things sound familiar it's only because there are millions of people out there parroting my ideas. Scarcity and choice. Now, because none of us can have everything we want, we have to make choices. Isn't that simple? We have to choose among our options. And what do you suppose our choices reflect? Our choices reflect internal and subjective values. Our choices will always be a response to the way each of us personally, independently, subjectively evaluates or weighs the opportunities that are open to us. Now, we are going to say more about that but let's move on now to the next overhead which is titled '5 Important Principles of Economics'.
Here's principle No. 1. Every person's choice reflects that individual's personal and subjective scale of values. This scale of values includes the option that person ranks most highly at that moment. Let's take 3 people who happen to be in this room, A. B and C. And suppose these 3 people have in their subjective scale of values at this particular moment the following options- someone wants to go, let's say this is No. 2, someone wants to go to a pizza parlor after class, at PIZZA, that's his second option. His 3rd option maybe there is a basketball game on TV tonight. Fourthly, this person just other things being equal, this person would read the first 20 chapters of 'Poverty & Wealth’ tonight. And the fact is that once you start reading 'Poverty & Wealth' you can't put it down, I mean, you're hooked. And so some of you will be up until 2 or 3 in the morning, I know that. So let's just go with B. Let's say he wants to watch on television hockey. You will never, I don't believe there's a person in the world who would ever want to watch soccer. I don't think anybody ever put soccer in their scale of values. So here's hockey, then maybe his mother may send him a piece of apple pie, homemade apple, Ooo, man that will go right to the top. And No. 4 he wants to read Tim Clancy, let's say. And then Person C, he wants to watch "I love Lucy". Now notice, these are all scales of values all things being equal, this person would really go get some pizza, this person would really play checkers, and number 4 read the Bible. This is the one member in the class who is really spiritual. But, every one of you has exactly the same things as your first and highest option and what is it? Being in this class at this particular moment. And how do I know that? The answer to that is you can usually tell what ranks high in that person's scale of values, because that's the choice they make. That’s the choice they make. There are a few exceptions and I'll tell you what those exceptions are shortly. OK? So everybody, put this down, everybody has a scale of values. Their scale of values tells us something about their character, their desires, their values and it all also explains why they are actually doing the one thing that they are doing, because whatever ranks highest in a person's scale of values is what he is doing at this particular moment. But please notice that scales of values change as time changes and as circumstances change. The minute I say the class is over, your scale of values changes dramatically. I've seen how you leave here, rush out of here. So, that's the 1st principle of economics. I still haven't mention money.
Principle No. 1 again- every person's choice reflects that individual's personal and subjective scale of values. This scale includes the option that person ranks most highly at that particular moment. But our scales of values continue to change minute by minute. For example- on those rare occasions when someone gets out of his seat and leaves the room for 3 or 4 minutes, something else has taken over first place in that person's scale of values. I have no idea what it would be. Consider 2 people with the following values at time T1. Jack, he wants to study for his exams. No. 2, he wants to watch TV, sports. No. 3 he wants to pig out on fast food. No. 4, he wants to play ping pong with Sam. That's Jack. Jill, she shares the same top value. She wants to study for her exams too, but she wants to watch public television, or No. 3 she'll like a dinner with Jack, or No. 4, read a Tom Clancy novel. Jill's an interesting person here.
Here's principle No. 2. We can usually know what ranks first in any person's scale of values by observing what he or she actually chooses to do. Now, just to show you that I am open to criticism, I used to use the word 'always' in here. We can always know what ranks first in any person's scale of values by observing what he or she chooses to do. But somebody raised an objection which I immediately knew was correct. Can you think what that objection would be? I was thinking of a person who is trying to deceive me. And we have students here who do that quite often, that is they try to deceive me, they never succeed, but they try. In my book, or at least in something that I written, I used this example. Supposed I know a friend who knows that I believe Principle No. 2 and he's going to fool me. So he invites me to lunch and I happen to know that he hates liver and onions. And he is obsessed with fried chicken wings. This guy is easy to pin down. So the waitress comes over, and he's got the menu and I order whatever I order. And I expect him to order fried chicken wings, and he says, "Please bring me the biggest order you can of liver and onions'. Well my jaw drops open, but immediately I know what he's doing. He's trying to prove my theory is wrong. See? So after they bring the liver and onions and I watch him gag it down, what a price he's paying to prove that I am wrong, he says, 'aha, I've got you, Nash. I know your crazy theory that we can know what ranks highest in a person's scale of values by observing what they do. I've just proven your theory is wrong. Because what I most wanted was fried chicken wings. The food I wanted least was this crummy liver and onions. And in a few minutes, I've got to leave the room and get rid of that liver and onions. But at least I’ve got the satisfaction of proving you wrong'. And I say, 'You didn't fool me at all. You see the mistake you made was thinking that I would believe that when you chose liver and onions that you really wanted liver and onions that rank highest in your scale of values. What really rank highest in your scale of values was proving me wrong. It wasn't the food, you fool. And you can't prove my theory is wrong. So you didn't want food at all. What ranked highest for you was proving Nash wrong, and you failed. And it serves you right. I hope you suffer all night eating that awful food'. Now, everybody in the audience of 500 people are just chuckling because they know that I don't mean that literally. There are some people who think that I mean everything I say but you know me better than that.
Now, here's principle No. 3. Economic value is always subjective. Notice-hear the word 'always' does not frighten me. Economic value is always subjective. Now what does that mean? This means that the value humans assign to any economic good,( I'll come back and define the term 'economic good'), this means that the value that humans assign to any economic good reflects considerations inside of that person. Economic value is never objective. That is it is never inherent in the object. Economic value is always subjective. Let me define the term 'economic good'. Something is economic good if people desire it and are willing to bear whatever that good cost. Now the cost of anything could be money cost, that is you might have to pay some money for it. But something could be an economic cost even if it is economically free, that is it doesn't cost any money. But if it at least cost you time, energy, then it's an economic good. If it is scarce enough to require some choice. The opposite of an economic good is a free good. A free good is something that is so easily attainable that it requires no sacrifice. For example, in this particular room at this particular time, breathing fresh air is a free good. Doesn't cost you anything. You're not giving up anything to breathe clean air in this particular building. Water is a free good. When I poured water over the ice in my Cleveland Indian mug it didn't cost anything. There was no sacrifice. Not only to have good water but to know it’s free. That's great. It is a mistake to think that economic value is objective. Take for example, I'm thinking right now of the McDonald's restaurant down the street and the millions of people around the world who at this particular moment are saying 'Give me a quarter pounder, fries, and a coke', which will kill you eventually. All that fat, all the caffeine, all the sugar, oh my goodness, and then the quarter pounder itself. Now I'm joking. I eat quarter pounders as much as any Hindu in the world does. I love quarter pounders. But, why do people drive 5 miles, stand in line for 30 minutes, pay 5-6 dollars for a quarter pounder? Because it inherently got that value? No, because the subjective value of that sandwich has a certain ranking in their personal scale of values. There are people who become obsessed with having a quarter pounder. It even obsesses me every now and then, about every 5 years. I just got to have a quarter pounder. But it's subjective. There's nothing to do with [objectivity], maybe I may want one tonight, I don't know.
OK, now, still pursuing this theme, we have in very large letters, again the sentence "All economic value is subjective". But now I add a disclaimer. My claim that economic value was subjective does not entail, does not imply that ethical value is subjective. I've given my economic stuff to lots of Christians and they've said, 'Oh, if he believes that economic value is subjective than he must also believe that ethical values is subjective'. How so? Why? Ethics and economics are 2 different subjects. The fact that one is subjective and does not imply that the other one is subjective. And I'm here to tell you that there are objective ethical principles. I do not believe that ethics is relative or subjective.
Now, here's an example. Go to a garage sale. Or go to an auction. Have you ever had a garage sale? That will teach you more about economics. When we moved away from Kentucky, we had a garage sale. We had all of this stuff that we have accumulated during the kids growing up. We had some paintings we wanted to sell. Let me give you some advice on having a garage sale. Whatever time you say in the papers that you'll open, there will be people walking up 1 hour earlier. And they'll be ringing your doorbell. You know who they are. They are the cherry pickers. They want to look at your stuff before anybody else does, and if you are dumb enough to put too low a price on it, those are the objects that are going to be gone. What you do is, 'Hmm, strange that you should ring our bell. We don't open up until 7 o'clock. You can sit right on that curb right there and we'll see you in 60 minutes'. Well, what they'll do is they'll leave and there'll go cherry pick somewhere else and then maybe come back at 5 minutes to 7. What have we got written on the screen here? What a person is willing to give up for 1 unit of something is best understood in terms of the subjective value that person places on that good at that time, ie where that thing ranks in that person's scale of values at that moment. What we are willing to exchange is not a function of any inherent value present in the thing. And of course people at garage sales especially who come early, who are the cherry pickers, they're often buying things from you to sell at their own garage sale next week. And if you're dumb enough to put something that is really desirable for lots of people that might show up at the antique mall in a week or so. These are sharpies??? But then again, don't necessarily kick yourself because somebody's grabbing something of yours if they may know something that you don't know, but if you weren't aware of what's really going to happen to the product that they just bought from you, you're be perfectly content, because you got what you wanted. These cherry pickers. Here's a painting that I paid 50 dollars for it. You can tell its a great painting. Let's see, was it a Degas? And the guy says we'll take 50 cents. Ha ha ha. I'm serious. Or my kid's bike. A good bike. Would you take 75 cents for it? I don't think so. Of course at noon, after no one else has bought it, I might give up on it.
Now, one more point with reference to subjective economic value. Christians, let me back up. Let me back up. This is a major insight of what we call Austrian economics. Now there are people out there in the economic community who are not members of the Austrian school who also recognize that economic value is subjective. But let me tell you something that I find very interesting. I am to a great extent a follower of the Austrian school I don't follow everything they say. But I have observed that many representatives of the Austrian school of economics are not many, not all, many are not particularly sympathetic to Christian concerns, Christian interests. Many of the early leaders of the Austrian school were people who were secularists, not particularly fond of things that were too religious. But what they often have trouble grasping is that the Austrian theory of subjective economic value is a theory that helps explain Christian scales of value and the way Christians appraise things and the choices that Christians make better than any other secular theory that is out there You see, given the Austrian view, the horizons of economics include things other than material goods. People do put enormous value upon things that are not material, things different than houses or cars, or stocks and bonds and antiques. Things like what? Things like love, things like compassion, things like needy people in 3rd world countries. And it explains why many people are willing to donate huge amounts of money to help people live for another day. And the Austrian position does that and a Liberal theory of economics doesn't. Really! I'm reading from the overhead. Many people value things like love and honor so high in their value scales, that their economic values will reflect this ranking.
Principle No. 4. Since economic value is subjective, then economic cost is also subjective. When you start calculating the cost of something, don't think that money explains this totally. Let’s go back to what I said earlier about scarcity. What important things are scarce in life? Money, is certainly one. What would be another thing that is scarce that could often be more important to you than money. Time. Today, I give you an example from today. Today, I had just enough time to go to Walgreens to pick up some prescription, but my wife and I are big on CoQ10. If you don't take CoQ10, I feel sorry for you in 30 more years. CoQ10, for people over the age of 50, you need that. So I didn't know whether Walgreens sold CoQ10. If they didn't I could have to drive all the way to K-Mart, assuming they are not gone bankrupt yet. Or further. So I'm walking down the aisle in Walgreen and there is 50 mgs of CoQ10. I grabbed the last 2 bottles. Now, I know that I paid more at Walgreens than I would have paid at K-Mart, but at that particular moment the time was more important to me than the money. We often make tradeoffs between time and money.
There had been times, I haven't been to a single spring training game this year and I don't intend to because I am a little disgusted with the Cleveland Indians. But for a long period of time, the Cleveland Indians rank right up there in my scale of values, right underneath the law. OK. God came first. Yes, He did. But the Cleveland Indians were often 2nd and I've been known the Saturday after Thanksgiving to drive all the way to Winter Haven. There's no other reason the world I'd want to drive to Winter Haven. To stand in a line for another hour and a half and get my choice of tickets for 5 or 6 Cleveland Indians spring training games. But not this year. Why would I do that, because I'm an aficionado. Where I sit when I watch the Cleveland Indians is very important to me. I don't want to be in the bleachers?? I don't want to be under the sun. I want to be in a certain place. Now that's silly, but it's no more silly than the things you do and no more silly than the things that people listening to this tape do because something ranks highest in their personal scale of values.
Now, cost then involves more than money. And the sooner you understand that for yourself the better you will understand when you have made a wise decision as to how you want to use your time or your car. The concept of opportunity cost. Here's the definition. The opportunity cost of anything turns out to be the 2nd highest ranked option in someone's personal scale of values. Remember, if you look at the 5 top options for any particular person which of course will differ from person to person, No. 2 will be the opportunity cost at that particular moment. Now, let's go back to this little chart here. We ranked 3 people in the class. The second highest ranked option for person A was pigging out on pizza. So the fact that you are here in this room for 2 hours is costing you that pizza. Of course that's not really that because you can have that pizza later today. You are not exactly giving it up forever, are you? That hockey game you can tape on TV. A lot of my examples don't work with television anymore. You could have pizza in the freezer. Who wants frozen pizza? And then if you missed tonight's "I Love Lucy", it will be on tomorrow, same episode. You won't miss a thing. Now let me give you an example. When I go to Louisville to teach at Southern Baptist Theological Seminary, I give up 3 entire days. Now what is the money cost? Really nothing, because they pay my expenses. They buy my plane ticket and so on. I do give up some good meals. You don't know how I suffer from those Louisville restaurants and I don't care whether we put this on all over the world or not. My goodness. Horrible restaurants in Louisville. But the opportunity cost for going to Louisville is time away from my family and you can't replace that. Time away from my grandchildren. You can't replace that, those experiences. Or maybe, I was going to say a book that I read but that's what I do on the airplane. Every trip, I'd read a whole book. Some of them are good, some of them are bad. So, well I'll give you 1 more example. Maybe I'll implant some guilt in the hearts of some church leaders. When I'm asked to preach within a radius of Orlando I just say 'yes' or 'no'. I don't ask what the honorarium is because I feel like I have an obligation to my community. So I've been known to drive all the way from Orlando down to Naples, Florida and back. That's a 500 mile trip and I pick up some meals along the way and I got an overnight and then I'm getting old and that drive gets kind of hard, and then you look at the check and you don't do this for money. You know that. But you say to yourself, I haven't even met my expenses. I have not even met my expenses. Let alone the value of my time and everything else.
Now, here are some important implications. The spiritual significance of opportunity cost. Let me relate this to child raising. Children need to learn sooner rather than later that everything has a cost. But the world is full of parents including a whole lot of Christian parents who want their children to think that everything is a free good because children don't know about sacrifice. They don't understand about money cost, they don't understand about opportunity cost until they are what, until they are married sometimes. And then all of a sudden they are facing a budget. The spiritual significance of opportunity cost. It's important in raising children properly. It's important in leading a church. It's important to making budget decisions whether it being a family or in a church, because everything has a cost. Can you afford this cost?
Second, how to gain information about people's changing subjective preferences. Answer- Observe their behavior. Unless they are intentionally trying to fool you. That's very rare, or unless they are psychotic or something else, their behavior will reflect things that are changing in their subjective scale of values. If a guy who hasn't been in church for a couple of months suddenly shows up, sometimes you've got to interpret this, it might mean that attending that church ranks highest in his personal scale of values at that particular morning and that might be a good sign. But it might mean that the hurricane winds that are blowing outside meant that he didn't feel like driving down to the First Baptist Church in Orlando, so he went to the closest place he could. There're lots of things that happen here.
Now, the importance of that information. Let's relate this to economic purchases. When people buy at a particular gas station for a particular price. when people go into a McDonalds rather than a Burger King. When people who go in to a restaurant or some fast food place where they can get a meal for 5 dollars instead of 15 dollars. Every time people make an economic choice, they are providing information to business people and to other consumers. When prices go up, that's information. When prices come down, that's information. And then I ask this question, can socialism provide that information? Rising and falling prices provider information to astute people about the changing subjective values of consumers. And if you know what to look for and you are an investor, and we all are in some respect or other, I suppose. It could help you make a wiser decision. For example, if you come to me and say,' Nash, you're the economic expert, would you advise me to open up a business that rents videotape'. Not on your life. I mean there's Blockbuster, there's Hollywood.com, and all this stuff, whatever it is. This is not a good time to do that. When should I have done that? About 25 years ago would have been a good time to do that. But you'll probably still be out of a business today anyway. Because you are not going to compete with Blockbuster. Or should I open up this kind of a clothing store, or something. Not when you are within 5 miles of the mall. Those days have changed. So, the changes of prices tell you something about the changing subjective values and give alert entrepreneurs information upon which they can make smarter decisions. So, can socialism provide any information? Not on your life. Does government intervention with markets distort that information? You bet it does, and that's a part of our criticism of socialism last week.
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