Tuesday, April 28, 2009

Free Markets (20) - 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;
  • makes 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.

Adding Value
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 or services that made people better off, so making money is good.

No comments: