To succeed in a free market, businesses must serve consumers. Imagine a florist who is passionate about yellow flowers but hates red and white ones. She loves them so much that she decides that she will only stock yellow flowers. To sell flowers, the florist will have to meet two conditions.
- She will have to find clients who want yellow flowers.
- She will have to sell yellow flowers at least as cheap as other florists.
This florist business would almost certainly struggle.
- When no yellow flowers are available, the florist shop will be empty.
- Most towns will not have enough people wanting yellow flowers.
- The shop will be quiet on Valentines Day when red roses are popular.
- The florist would lose clients wanting white flowers for weddings.
- The florist might be able to persuade some people wanting red flowers to buy yellow ones, but that would be hard work.
- If a belief that yellow flowers bring bad luck prevailed, none would sell.
- The florist could try and get the government to pass a law outlawing red flowers and white flowers, but that would be almost impossible.
To increase sales, the florist will have to overcome her dislike for red and white flowers enough to make them available to customers.
Consumers can indulge their preferences for flowers provided they are willing to pay for them, but once the florist decides to sell flowers to the public, she loses that freedom. She does not have to change her preferences, but she is faced with a stark choice between serving her customers and losing sales. Selling in a free market will force her to respond to the preferences of her customers.
Free markets force businesses to serve their clients. A business that does not provide the goods and services that their clients want will lose customers. A business that produces the things its staff enjoy producing, or the things that it thinks people should buy, will eventually fail. A successful business must serve its customers. Free markets set consumers free, but they are very constraining for businesses.
Serving the Church?
Pastors do not understand the tyranny of the market, because they work in a different world. They are not called to serve their customers, but to change them. A pastor is selected for his theological views and he is expected to preach that line to his church. He does not change his message to match the tastes of his listeners, but preaches what he believes God wants them to hear. A pastor is expected to implement his vision for the church. Those who are not stirred by his vision are advised to seek another church.
The pastor is charged with changing the thinking and behaviour of his people to be more like his own. His purpose in life is to persuade people to like yellow flowers (gospel truth). He would be failing in his duty, if he allowed them to choose any coloured flowers (pluralism). This means the pastor's customers are usually wrong. If the pastor has the ear of God and preaches clearly, backsliders and rebellious people will reject his message (you can't make me like yellow flowers). A response that would be a sign of failure to a business is actually a sign that a pastor is preaching boldly.
Businesses must serve customers to succeed. Pastors do not understand the tyranny of the consumer, because they do not have to serve them to succeed.
Theology and Value
Theologians are expert on values.
- God is good
- Murder is evil
They understand these values, but when it comes to economic issues they get confused. Free markets allow business to create value, yet theologians make statements like these.
- Free markets are morally flawed.
- Capitalism is evil.
- Making money is wrong
- Profits are bad
They tend to support actions that destroy value and object to institutions that add value. Despite their expertise, they seem to be confused about value.
Theologians tend to see profits as a sign of immoral behaviour. They assume that money is made by cheating people. This is not true. Successful businesses must offer things that people want. This is not easy, because people will only buy products that:
- are more valuable to them than the price they have to pay for it;
- are more valuable to them than any other product at the same price;
- make them better off than they were before making the purchase.
If a business cannot produce things at a price that fulfils these conditions, buyers will go to other producers or buy different products. Producers who do not make people better off will not make a profit for long.
Profit is a crude measure of the extent to which the business has made people better off. The costs of production reflect the value of components, materials and labour used in production. The price received reflects the value to buyers purchasing the product. The difference between sales and costs reflects the additional value created by the producer.
Profit = income - expenditure
Profit ≈ value added
This is new value that did not exist before. The producer created the value by making the product and by finding people who valued it.
To make a profit, a business must add value. They must take some components and put them together in a way that makes them more useful to other people. The components must be worth more when put together in the product than they were worth separately. That is adding value.
We want producers to add value, so we implicitly want them to make a profit. Therefore, profit is good. This is acknowledged in the scriptures.
All hard work brings a profit, but mere talk leads only to poverty (Prov 14:23).
The plans of the diligent lead to profit as surely as haste leads to poverty (Prov 21:5)
Businesses make money by adding value. They must have produced goods ore services that made people better off, so making money is good.
Governments do something different. They give their services away free, so they do not have to add value to ensure that people want them. We assume it is good that governments do not make profits, but this makes them dangerous. People do not have give anything up in exchange for government services, so the government does not have to worry about supplying products that than will make them better off.
Governments functions by taking from one person and giving it to another. This is a zero sum situation. Governments can only help one person by taking from another person. They do not add value, but shifts it from person to another.
A government will usually destroy value. The process of taking from one and giving to another has a cost, so governments never give as much as they take. They always keep some of what they takes, so governments inevitably destroy value. Economists call this deadweight costs.
The difference is important.
- Businesses operating in a free market create value to make a profit.
- Governments using coercion to transfer value add dead weight costs.
Profits result from benefiting people.
Deadweight costs are hard to justify.
Many people expect free markets to act as economic providence. They assume that when Adam Smith referred to an "invisible hand" working through markets, he was saying that it can "work all things together for good". The common assumption is:
Invisible Hand = Providential Force
Anyone who understands how markets function knows that this is not true.
Markets are not rational entities, so they cannot act to produce a perfect world. Adam Smith understood this well. He only referred to the invisible hand three times in his writings. He used the term to describe situations where a business owner acting in self interest does things that benefits society in a way that he had not intended. Smith never described the "invisible hand" as a hidden divinity that would work all things for good. He had a more realistic view of the way that free markets function.
A belief that free markets work everything for good is totally unrealistic. Those who equate markets with providence have trusted in a false religion.