Our broader mission at IFWE is to help Christians understand the power of economic thinking as part of whole-life stewardship. We believe that the tools of economics are God-given, and once we understand them better we can see that they are grounded in biblical truth.
Earlier I explained one of the most foundational principles in economics, “There is no free lunch.” This means that every choice we make involves a cost. Some choices are bigger than others, but they all cost us something.
More recently, several IFWE authors discussed the merits of production and trade from a biblical perspective. We are called to produce and trade using our God-given skills and talents. It’s what we were created to carry out.
But what about when conditions make producing and trading hard, difficult, painful? Answering this question leads us to the next principle in our series on economics:
Principle #5: Transaction costs are an obstacle to trade.
What is a transaction cost? Drs. James Gwartney, Richard Stroup, and Dwight Lee, authors of Common Sense Economics, explain transaction costs this way:
Trade itself is costly. It takes time, effort, and other resources to search out potential trading partners, negotiate trades, and close the sale. Resources spent in this way are called transaction costs, and they are an obstacle to the creation of wealth. They limit both our productive capacity and the realization of gains from mutually advantageous trades.
A transaction cost is the cost(s) over and above the monetary price paid for a good or service. They range from relatively small (I must peel the orange before I eat it) to prohibitive (licensing requirements which make it difficult to start a business).
Transaction costs can be high for various reasons:
- Physical obstacles: poor road access, rivers, or mountains may make getting goods and services difficult.
- Political obstacles: regulations, tariffs, quotas, price controls and licensing requirements.
- Information obstacles: people may not know where to locate a good or service, and must spend time trying to find this information.
Certain passages of the Bible encourage us to consider the transaction costs of our actions. Luke 14:28-30 tells us the parable of the tower builder:
Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it? For if you lay the foundation and are not able to finish it, everyone who sees it will ridicule you, saying, ‘This person began to build and wasn’t able to finish.’
The next few verses, Luke 14:31-32, tell a parable of a king going to war:
Or suppose a king is about to go to war against another king. Won’t he first sit down and consider whether he is able with ten thousand men to oppose the one coming against him with twenty thousand? If he is not able, he will send a delegation while the other is still a long way off and will ask for terms of peace.
Up to this point, not much of what we have discussed is very radical or counter-intuitive, and scripture is clear that it is important to estimate costs before engaging in an activity.
But here is the question: Should we always count and be aware of the costs of our decisions? Might we need to help someone in the short term without thinking about the cost?
In our private lives, we tend to try and understand the costs associated with our decisions and then minimize them. We do this because we directly bear those costs. When we make decisions publicly (through the state) we do not bear the immediate costs. Thus, we tend to forget or ignore transaction costs. In some cases we exacerbate them.
How much should Christians consider the cost of an activity before carrying it out?