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Economics in the Bible

This week for Ask an Economist I received a question from Steve R. It’s a question of Biblical proportions! He says,

“This past Sunday the pastor talked about 2 Kings 4: 1-7, the story of Elisha and the widow’s oil.

My mind went off on a tangent regarding the miraculous creation of olive oil from the widow’s small container, which filled many other containers so she could pay off her late husband’s debts and even live off the rest of the money.

I got to thinking about whether it’s different from the way central banks print money and devalue currency.”

Steve goes on to give two hypothetical differences between God’s creation of olive oil and the central bank’s creation of more money. I’ve chosen to exclude them at this point because he isn’t far off, and I’d rather build toward the answer than lay it out. Steve concludes with,

“I just wondered if my conclusions are correct and if you had ever thought about this or other economic situations from the Bible.”

So the two questions are:

1. What are the similarities/differences between God’s creation of olive oil in 2 Kings 4:1-7 and the central bank’s creation of money?

2. Have you ever thought about other economic situations from the Bible?

I’ll consider both in turn.

The Supply of Oil

So what’s the difference between increasing the money supply and increasing the supply of a commodity like oil? To start, let’s consider the effect of increasing the supply of a commodity like oil.

In order to sell oil, producers must bear some cost. For example, if producing a cup of oil costs $1 sellers must receive at least $1 in order to be willing to produce. Based on this, it may be tempting to claim that prices are determined by cost, but this is not right.

Prices are completely determined by consumer valuations which often manifest in terms of costs.

For example, imagine the only ingredient to making olive oil is olives. Now let’s say consumers are willing to pay 20 cents per olive, and it takes five olives to make one cup of oil. These numbers are unrealistic, but will help us understand the market.

If a company wants to make one cup of olive oil, it must give up the money from the sale of five olives. Five olives which cost 20 cents a piece means that producing one cup of olive oil causes the producer to forgo $1 (5 x $0.20) of money from olives. Thus the cost of one cup of olive oil is $1.

But remember that the cost itself is derived from how much consumers value olives! If consumers suddenly decided they liked olives more (say they were willing to pay $1 for each olive now) then olive oil producers would have a higher cost per cup of production ($1 x 5 rather than $0.20 x 5). But, ultimately, the cost is derived from how much the consumers value the alternative goods produced by the inputs.

This remains true even if we make the example more complicated with more production inputs.

It’s also the case that as production increases, sellers are going to require higher prices, all else held constant. To understand why, imagine some olives are better for making olive oil than others.

This violates an unspoken assumption we’ve had to this point that all olives are equally good for eating and oil production. But if some olives are better at producing oil than others, businesses will use the ones best suited for producing oil first. This means the more the business produces, the more olives are going to be required to produce the same amount of oil, because the best oil-producing olives are used first.

In other words, as the quantity of oil a business supplies increases, the sale price required to satisfy the producer will increase because the cost of the inputs (olives) used increases as determined by consumer valuations.

Economists capture this idea neatly in what is called the supply curve. The supply curve illustrates the various quantities which producers are willing to sell at any given price. This relationship between quantity supplied and price is called supply by economists. Because of the logic above, the supply curve slopes upward and will look like this.

Economists similarly are interested in the quantity of a good consumers are willing to purchase at any given price. This concept is called demand. Steve’s question is primarily about supply, so I’ll spend less time explaining demand.

Essentially, though, consumers use the first unit(s) of a good to satisfy their most urgent desires. This implies every subsequent unit is used to satisfy a less urgent desire. In other words, as you receive more units of a good, you value the next unit relatively less because it serves a less valuable end. As such, as the quantity of a good increases, consumers’ willingness to pay for each additional unit of that good falls.

In other words, the demand curve for a good slopes down. Supply curves are actually derived from the same logic applied in a more roundabout way. So our supply and demand curves for oil might look something like this.

In this market, consumers will buy 3 cups of olive oil. Why? Well the supply curve shows us that sellers are willing to sell the first cup for $1 and buyers are willing to pay $5 for it. So it makes sense for an exchange to occur. Similarly sellers are willing to sell the second for $2 and customers are willing to pay $4. Again, this is a win-win.

For the third cup, sellers need at least $3 to sell and buyers are willing to pay $3. Both are willing to agree to the exchange. So in the end three cups are sold and the price that enables this is $3. This point where supply and demand cross is called the equilibrium point by economists, and it illustrates how the market process determines prices—everything else held constant.

Armed with this knowledge, we can now see the effect of the miraculous creation of oil in second Kings. At every given price, there is now more oil available than before. In other words, our supply increases. We can illustrate this by having a larger quantity of oil at every given price. That looks like this:

Notice what happened to the equilibrium. There is now more oil being sold (3.5 cups) and a lower price for oil ($2.50).

This is what I expect is the effect of the miracle in second Kings. The increasing supply led to a larger quantity of oil being consumed at a lower price. There’s a way to conceptualize this as being a demand change instead, but this analysis does the job fine.

The Supply of Money

So let’s talk about what happens now when the supply of money increases. Right now we live in a monetary system where the money is issued by the government as a legal means of paying debts. Economists call this a fiat money system. Fiat money is contrasted with commodity money systems where the currency is redeemable for some fixed amount of some commodity (like gold or silver).

The supply of money can be increased in both a commodity system and a fiat system. In the former case, increasing the supply of the commodity (e.g. mining gold) will increase the supply, and in the latter case the government could increase the supply (e.g. printing money). The constraints on producing more fiat money are different than for producing more commodity money, but they both have variable supplies.

But what happens when the supply of money increases? Well, the market for money is much like the market for other goods. People demand to hold money. The “price” of money is what it costs in goods to obtain a unit of money. The more goods you need to obtain one unit of money, the higher the “purchasing power of money” is. So, one way we can think about the price of money is that the price of money is its purchasing power.

As the purchasing power falls (i.e. as money prices of goods and services rise), people want to hold more money to satisfy every day needs for money. It’s important to note that when we’re talking about “money” here we don’t mean “wealth.” You can hold your wealth in many forms: stocks, real estate, and paintings to name a few. However, when economists talk about the demand for money, they’re talking about the demand to hold money rather than other assets.

For sake of ease, let’s assume some fixed amount of money exists—say 100 units. Here is our supply and demand for money.

Now let’s imagine that the supply of money suddenly doubles. Look what happens:

The purchasing power of money falls. Just like our oil example, when the supply of money increases, the value of money decreases. So in one way our miracle in second Kings is similar to an increase in the money supply. Both result in the good which increased in supply having a lower value relative to other goods and services.

But here is the primary difference. Money represents one side of nearly all exchanges. For (almost) every exchange that happens, one side is bringing money to the table. This is not the case with olive oil. So when God increases the supply of olive oil, the market for olive oil (and closely related markets) is impacted. However, when the supply of money increases, every price is impacted. Prices of all goods and services rise.

This leads to a few important issues. First, because of limited knowledge, the price changes that happen due to an increase in the money supply don’t all happen at once. Instead, new money affects prices and incomes in some markets before others. This means the relative prices of many goods and services will be disturbed while the new money ripples through the economy. These price changes in turn result in distortions in the structure of production, a phenomenon known as the Cantillon effect.

Second, because many people store a significant amount of their wealth in the form of money, the lower purchasing power means lower wealth for a large portion of people. Specifically, increases in the money supply hurt money savers. In contrast, an increase in the supply of olive oil would impact those who hold a significant amount of wealth in olive oil. While such a change would hurt olive oil investment maximalists, the increase in the supply of money would be painful for the much larger group of currency savers.

Third, one very important type of exchange which is paid out with money is impacted: labor contracts. Many salaries and wages are pinned at somewhat fixed amounts. For example, if you signed a contract agreeing to work for $50,000 per year, that amount won’t increase with inflation. As such, an increase in the supply of money will hurt those whose income terms are relatively more fixed.

In some ways, money is “just a good.” People, and society as a whole, are better off for having access to a medium of exchange. In other ways, though, money is more than just a good. Since money makes up half of all exchanges, a disturbance in the market for money has much larger consequences for the economy as a whole.

Biblical Economics

Steve’s last question was about whether I’ve considered other similar questions about the Bible and economics. I have and can think of three separate types of questions at the intersection of the Bible and economics.

1. Moral/ethical

This category considers whether certain economic actions or policies are morally right or wrong by Biblical standards. Alejandro Chafuen has written a great book on the subject titled Faith and Liberty: The Economic Thought of the Late Scholastics. The book examines the Christian Late-Scholastics who discuss the morality of everything from taking bread while starving to monetary policy.

2. Philosophical

This category considers the nature of God’s creation and asks what role economic concepts have in it. For example, is the existence of scarcity a result of the fall, or does God’s call for Adam and Eve to work in the garden provide evidence that some level of scarcity is consistent with “good” creation?

3. Functional

This category examines the results or economic reasons for particular Biblical actions or institutions. The question about the supply of oil is a functional one. Similarly, many of my professors and colleagues are economists who are interested in explaining the rationale behind certain economic systems. My graduate Microeconomics professor Walter Williams includes the following list of questions for his PhD students on his website:

Give economic interpretation of the following excerpts from Exodus and Deuteronomy: Nonsense is forbidden!

(a) ‘The woman shall not wear that which pertaineth unto man, neither shall a man put on a woman’s garment: for all that do so are an abomination unto the Lord thy God.’

(b) ‘Thou shalt not plow with an ox and an ass together.’

(c) ‘He that is wounded in the stones, or hath his privy member cut off shall not enter into the congregation of the Lord.’

(d) ‘Honor thy father and mother. . . .’ (How come honoring of children is not required by the Commandments?)

(e) ‘Thou shalt have no other gods before me.’

(f) ‘And if a man entice a maid that is not betrothed, and lie with her, he shall surely endow her to be his wife. If her father utterly refuses to give her unto him, he shall pay money according to the dowry of virgins.’

(g) ‘A bird in the hand is worth six in the bush.’

For statement (a), it seems like the most likely explanation is that such an arrangement allows clothing sellers to charge different prices to men and women according to their different willingness to pay. Economists call this price discrimination. If groups with different willingness to pay can resell their products to each other, price discrimination is impossible. However, if resale is prohibited by law (Biblical or otherwise) price discrimination is possible!

You can spend your time trying to think through the other questions. Similarly, a few other economists I know have recently tried to explain how the Jewish ban on pork served the function of eliminating pig-based externalities.

Some Christians are uncomfortable with these sorts of functionalist explanations because there is a fear that they undermine the explanation that Biblical laws are written based on moral truth. Personally, I don’t see any contradiction between the two. It seems likely to me that moral laws would be functional as well.

In conclusion, I think the intersection of the Bible and economics is truly a fruitful one, and I’m grateful that Steve gave me a chance to explore this topic.

Content syndicated from Fee.org (FEE) under Creative Commons license.

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