Economics 101 & Public Square & Theology 101

The Economics of Income

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I had the exciting experience last Thursday of being interviewed by Janet Parshall on her radio show, “In the Market with Janet Parshall” on Moody Radio Network.

Janet is a wonderful host, and asked some very thought-provoking questions based on a research paper I wrote earlier this year, “Why Does Income Inequality Exist?:  An Economic and Biblical Explanation.”

Janet asked an important question that I think we as Christians are all struggling with, especially in today’s economy. Her question went something like this:

A person goes to school and becomes a medical doctor; they work hard and with integrity. Another person also goes to school and works hard and becomes a teacher. The doctor makes a six-figure salary, and the teacher makes much less, but we need both. How are Christians to reconcile the vast salary differentials among these two important vocations? 

I believe that this is where an understanding of economic principles, derived from biblical truths and an accurate scriptural interpretation of human anthropology, can really help us as we wrestle with these questions.

Empirical Observations

Janet is absolutely correct that there is a wide range of incomes across many crucial vocations and professions. Doctors make more than teachers and firefighters, but we need all of these jobs to bring about the flourishing that God desires for us.

Economics can help us unpack and better understand how some of these realities make sense and might even be a good thing. In economic terms, prices reflect relative scarcities of goods and services.

Economist Friedrich Hayek noted in his essay The Use of Knowledge In Society that,

We must look at the price system as such a mechanism for communicating information if we want to understand its real function…The marvel is that in a case like that of a scarcity of one raw material, without an order being issued…tens of thousands of people…are made to use the  material or its products more sparingly. 

When goods or raw materials that we use to make other goods gets more scarce, the prices go up. This is a good thing!

We are called to be good stewards of our scarce resources, and when those resources get even more scarce, we need to conserve them more than we did before. Prices help us understand how relative scarcities of a given resource are changing.

The Economics Behind Incomes

Your income is the price of your labor. You give up some of your time, energy and talents. In return, you are paid a price for your labor which is your income, plus any benefits you receive.

Typically, professions or jobs with higher incomes tell us something about the scarcity of resources that are necessary to bring about the service.

Consider what it takes to become a pediatric neurosurgeon. It takes intelligence, but also lots of training and years of education. The high price the market puts on that labor is an important signaling device: the high price put on that labor is a market signal for more of it.

  • When an industry has a particularly high profit ratio, it induces entrepreneurs to enter that industry.
  • As more entrepreneurs enter, the profit margin is driven down by competitors.
  • As competition increases, we usually get lower prices and better quality. Think about the market for televisions: they continue to have better picture quality and the prices continue to decrease.

The same phenomenon occurs in labor markets. Laser eye surgery is a good example.

When the technique was first discovered in 1980, there were very few people that knew how to perform it. Laser surgery was a great health improvement for many people, and the lure of profit drove doctors into this field. The price of the laser eye surgery continues to go down, and the quality and technique continues to improve.

If you are the only doctor in the country who knows how to perform a surgery in high demand, you can expect a high income because of the relative scarcity of the service you are providing.

As more doctors get trained in this field, though, salaries are driven down. We can’t forget the important economic phenomenon that goes along with that drop in salary: the price of the surgery goes down so that more people can afford it. This benefits everyone, but has significant positive benefits on the poorest income groups.

Rethinking Salary & Prices

Prices tell us a vast amount of information that we would have never been able to understand otherwise. It is important to focus on why and how incomes and prices are changing.

Prices help us to be better stewards over our scarce resources and we know that, absent cronyism, incomes reflect the relative scarcities of the services rendered.

Lastly, it is important not to equate salary with intrinsic worth or value in God’s eyes. John 3:16 tells us that God so loved the world that he sent his only son to save us.

That applies to everyone who will take him up on his offer, regardless of where they went to school, how much money they make, or how many cars they drive. God’s love for us is bigger than any income we could ever make.

In the coming weeks I’ll be diving deeper into this topic, focusing especially on biblical principles that provide the framework for the empirical and economic observations I’ve made here today.

What do you think? What function do prices and incomes serve, and why might they differ between industries and jobs? Leave your comments here

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