Free exchange: why capitalism works

Most people have the idea that when you buy something, you pay (or should pay) an amount of "money" that is "worth" the same as the value of the item purchased. Actually, this is not true.

When somebody buys something, they are giving an amount of money that is, to them, worth less than the item they are buying. However, from the seller's viewpoint, the situation is reversed: he is accepting an amount of money that is worth more (to him) than the item sold.

If this were not true, nobody would ever sell anything. People sell things to earn wealth. Therefore, people sell things for prices that are higher than the worth, to them, of the product they are selling.

Value is actually a subjective thing. An evening watching Monday night football with the guys might be worth a lot to most American fathers and husbands, but it's worth zilch to me because I hate football. (Actually, if there were wings and pizza involved, it wouldn't be worth zilch to me, but it would still be worth less than an evening watching Star Wars with my wife and kids. Or my in-laws, for that matter. With pizza.) The worth of a particular item, service, or experience to you is a very unique thing, because God made you a unique individual. It's not worth the same to you as it is to anyone else in the world, although with prices we get an idea of the average worth of something to society. Tickets to that said Monday night football game might be pretty expensive, because it is worth a lot to most people, even though it is worth nothing to me.

So, if you purchase a pencil for, say, 10 cents, it may be that the pencil is actually worth 12 cents to you, while it's worth only, say, 5 cents to the seller. (He doesn't need a pencil as badly as you. He has plenty.) The price of that pencil is going to be set by supply and demand, which is the accumulation of literally millions of buying and selling decisions across society. If a pencil is worth 12 cents to you, but is worth 50 cents to the seller (suppose it costs 40 cents to make and he needs to make 10 cents per pencil sold or else he could be making more money flipping burgers, in which case he'll give up his pencil selling career and go flip burgers) then no sale of the pencil will take place, to you. (Of course, if the rest of society feels that pencils are worth 90 cents, they are going to flock to this guy and he is going to sell a lot of pencils. This is how football teams continue to earn money despite the extreme drawback that I am not interested in football.)

But in the situation where you and the seller agreed on the price of 10 cents, something wondrous has occurred: you have parted with 10 cents, and gained something worth 12 cents. Your wealth has just gone up by two cents. (Yes, that's not very significant, but it might be if we were talking about beachfront property in Florida instead of pencils.) Meanwhile, the seller has parted with something worth 5 cents, and gained 10 cents. Therefore, his wealth has just gone up by 5 cents. Together, the two of you have 7 cents more of wealth to use. And use it you will. You're going to use that pencil to write something that has some value to you (maybe a grocery list, or maybe a bestseller novel). The seller's going to use those cents to buy something of value to him (maybe groceries). The fact is that, as a result of what the two of you just did, society on the whole has gained seven cents of wealth.

Every time people voluntarily exchange goods, services, and/or money, it is because both of them are gaining in wealth (value). And therefore, every time such free exchanges happen, society gains in total wealth. Civilization advances. When such free exchanges are going on at a rapid pace, we are all blessed. We have what we describe as a "healthy economy."

But suppose a gangster comes through and threatens to shoot anybody who sells pencils for more than 5 cents. Hopefully that doesn't happen in your neighborhood, so let's use a more realistic example: suppose people realize that pencils are worth only 5 cents to the seller, and they get mad about the seller who is "exploiting" people by selling his pencils for "jacked up" prices. They vote and pass a law that pencils may not be sold for more than 5 cents, on the principle that a higher price is "unfair."

Interestingly enough, though the motivations are completely different, the economic effects are the same: if the seller can't get more than 5 cents for his pencils, he has no point in selling them. He has to support his family (or even just himself), so he quits selling pencils and starts doing something else like flipping burgers or painting houses. Suddenly there are less sellers of pencils and less pencils available. This maximum price has caused a shortage. In fact, maximum prices always cause a shortage. This is true whether or not the people who imposed the maximum price are gangsters, kings, or voters with pure motives. (There's really not much of a difference, and all three are disobeying God, and society suffers because of their disobedience.)

Suppose people get mad about the shortage and pass a law that pencil sellers may not go out of business. Now the pencil seller has become a slave of society (which is wrong) because he has lost his freedom. Moreover, every time he sells a pencil, he is taking a loss. Why? Because in selling that pencil, he's not just giving up the 5 cent pencil, he's also spending time, money, and effort to sell it. That time, money, and effort has a value, which means he's giving up more than 5 cents of value with every sale. Instead of gaining wealth, he is losing wealth. And instead of gaining wealth, society is now losing it, and instead of advancing, civilization is now running backward. Thanks to the helpful king who imposed the minimum price. Or the voters who think that voting entitles them to do anything a king could, and still call it freedom.

Free exchange results in wealth creation and advancement for all of society. Forced exchange, exchange that has been interfered with in some way, whether through making somebody buy or sell something at gunpoint, or through setting maximum or minimum prices, or anything else that interferes with private property rights, results in a loss to one or both parties in the exchange, as well as society.

(This has interesting consequences if you think about labor as a service and wages as the price paid for that service and think through what happens when people set maximum or minimum prices for it. Remember, people may have good intentions but still cause bad consequences.)

God said "thou shalt not steal." That means other people own their property, and it's not yours. You don't have a say in it. You're not even supposed to covet it. If God told you not to steal, why are you ever telling people what they can and cannot do with their property (including what they can and cannot sell it for) as if you owned it? God dictated this about ownership: "While it remained unsold, did it not remain your own? And after it was sold, was [the purchase price] not under your control?" (Acts 5:4)

God commanded "You shall do no wrong in judgment, in measurement of weight, or capacity. You shall have just balances, just weights, a just ephah, and a just hin: I am the Lord your God, who brought you out from the land of Egypt. You shall thus observe all My statutes, and all My ordinances, and do them: I am the Lord." (Leviticus 19:35-37) When we let the free market function (which God ordained by instituting private property), we all collectively function as a giant distributed supercomputer, which computes appropriate prices to maximize society's wealth. When people start setting rules for other people about what prices they can and cannot set for their property, however, this computation is frustrated. The measurement cannot occur. We set the balances off. And amazingly, God has so written His Law into the fabric of the universe that, if we try to do this as a society, we as a society suffer. How just of the Just One!

If we would have faith enough to follow God's law instead of trusting our own poor judgment, we wouldn't try to exert this kind of power of other people, and we would all be blessed.