Economics in Christian Perspective: Theory, Policy and LifeChoices
As academics, we all want listeners or readers who are interested in what interests us. They make our days. Like Luke who wrote both the gospel that bears his name and the Book of Acts for Theophilus, we have an interested audience in mind. Claar and Klay want to reach Christians who have no knowledge of economics, but are interested in learning about how it can help them live their lives and evaluate public policies. As professors it is not surprising that they expect to find these people mainly among college students, although they hope for a wider audience. Because it uses none of the standard principles of economics diagrams, this book should be viewed as a supplement rather than a primary text for most introductory economics courses. Each chapter concludes with suggestions for further reading.
Near the beginning and again near the end of the book, Claar and Klay speak of society as a tripod having a free market economy, a democratic government, and strong moral and cultural institutions as poles (17, 215). The most important of these legs for them is the freemarket economy. In Chapters 1 and 2 (and periodically thereafter), they “make the case that the role of government should be a limited one” (10). They note that markets do not cause selfishness (31), but like most economists they believe in the “invisible hand.” In The Wealth of Nations, Adam Smith said that although everyone tends to behave selfishly, the results tend to be good for others and for society as a whole (under certain assumptions). Smith said that it is as if the process were guided by some “invisible hand.” While Claar and Klay are careful to say that “as Christian economists we believe that God, not the market system, is the ultimate source of virtue, meaning and happiness,” free markets are clearly the first leg of the tripod for them (45). One of the virtues of free markets for Claar and Klay is that they are “overwhelmingly democratic” and perfectly competitive (47). Monopolies are ignored, except for those created by patents to encourage innovation (79-81).
If markets are good, then government-initiated limits on them are bad. Indeed Claar and Klay call trade barriers “un-Christian” limitations on free choice (38). Chapters 3 through 5 admit some roles for government in correcting market outcomes. Our selfishness causes us to ignore the benefits and costs of our actions for others, so we tend to do too little of what helps others and too much of what hurts others. Governments can correct these “market failures” by subsidizing activities that benefit others and taxing activities that impose costs on others. For example, people who are immunized are less likely to get sick, but they are also less likely to infect others. People base their decisions about immunizations on their own (or their children’s) reduced probability of illness and ignore the benefits to others. The result is that too few immunizations are traded in free private markets. Government subsidies for immunizations can increase the number of immunizations to the socially best level. Similarly, in the absence of pollution control laws, paper producers will consider their own costs of production, but tend to ignore the costs to society of damages to the environment and human health resulting from producing paper. Pollution taxes, standards, or tradable permits can reduce the amount of pollution to the socially best level. While economists agree on these economic theories of “market failures,” we differ in practice about the desirability of particular public policies to correct the problems, because we differ in our assessments of how important these problems are. Claar and Klay are among those who think that little government intervention in markets is justified, because the problems are relatively unimportant compared to the risks that government will cause by trying to fix them.
Chapters 6 and 7 extend this view that usually free markets are best left alone into the analysis of unemployment, inflation and economic growth. In Chapter 6, Claar and Klay argue that “there is a moral imperative of economic growth for Christians” (111). “Economic growth is neither good nor bad in itself” (43), but it “enhances the opportunities” for people by improving per capita incomes (44). Low unemployment and low inflation are also listed as macroeconomic goals, but they do not merit the “moral imperative” status accorded to economic growth.
Claar and Klay explain the macroeconomic theories of the last century in terms of paradigm shifts. John Maynard Keynes sparked the first paradigm shift during the Great Depression of the 1930s. Classical economists had thought that high unemployment would be temporary, because it represented a disequilibrium condition. Eventually full employment would be restored as prices and wages adjusted. In the classical view, production generates the income necessary to buy it, or as Say’s Law put it, “supply creates its own demand.” Keynes argued that discretionary fiscal and monetary policies were necessary, because the economy could be in equilibrium at high unemployment rates, if spending were too low. In equilibrium, businesses will produce only what people want to buy. If people do not buy everything that businesses produce, then production will drop to the level of spending. Say’s Law had it backwards; demand creates its own supply.
According to Claar and Klay, another paradigm shift to a new classical macroeconomics occurred in the late 20th century. In this view, rational expectations will cause discretionary fiscal and monetary policies to be ineffective for the following reasons. The expansionary fiscal policy represented by “stimulus package” tax cuts in early 2008 will not reduce unemployment. People will save, rather than spend, the “economic stimulus” checks, because they anticipate that taxes will rise later to repay today’s tax cut. The expansionary monetary policy implemented by the Federal Reserve in late 2007 and early 2008 will not reduce unemployment. People will anticipate inflation based on the increasing money supply, so they will insist on higher wages now, in advance of the actual inflation, to maintain the expected purchasing power of their wages. Employment will revert quickly to full employment whether there are discretionary monetary or fiscal policies or not; only the price level at which this full employment exists will be different. In this view, discretionary monetary and fiscal policies will only be effective if they are unanticipated, and “Christians cannot embrace…(policies that are) . . . successful due to deliberate trickery and deceit” (135).
It would be better to say that there is a continuing debate between variations on classical and Keynesian macroeconomic themes concerning the advisability of active discretionary monetary and fiscal policies. It is not helpful to defend the rational expectations theory by characterizing workers who do not behave according to it as “dense, naïve . . . (and)clueless” (134). Because information takes time and effort to discover, there is an optimal amount of ignorance that rational people have about many topics. “Rational ignorance” causes some people not to have “rational expectations.” Claar and Klay see real business cycle theory as the only other “viable” macroeconomic model (136). This theory is a different variation on the classical theme that sees macroeconomic fluctuations originating with “technological advancement . . . (that causes) . . . existing capital and job skills (to) become obsolete” (137). But there are also new Keynesians who argue that prices and wages adjust slowly even if people do have rational expectations, so there is still some role for discretionary policies. Claar and Klay speak for many, but not all, contemporary economists when they say “today we are not content with a policy designed around the (Keynesian) adage ‘In the long run we are all dead’” (141). As Samuel said to Saul, “What then is this bleating of sheep in m years?” (I Samuel 15:14). When faced with the prospect of recession, some economists have supported discretionary monetary and fiscal policies in 2008, because they do not want to wait long enough for full employment to be restored without such active policies. Echoing Mark Twain, the demise of all variations of Keynesian macroeconomics has been exaggerated greatly.
Poverty and inequality are discussed in Chapter 10. Evidence is given that inequality is reduced by existing taxation and expenditure programs in rich nations, but this is said to reduce poverty (207). While poverty “must motivate Christians to action” (196), Claar and Klay think that we should not be concerned with inequality. How are inequality and poverty related? Inequality would imply poverty, if poverty were defined as having less than others. Because poverty defined in this way is not a solvable problem given inequality, often poverty is defined in terms of a standard of living. Everyone could reach a certain minimum amount of food, clothing and shelter without requiring complete equality. Claar and Klay see economic growth as the hope of poverty reduction. In Chapter 8, they discuss how free international trade and foreign investment can enhance this economic growth and thereby benefit of the poor.
This book will find use as a supplement in introductory economics courses in Christian colleges. Adopters will be those who agree with Claar and Klay that the economic roles of government should be limited.