No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Two: Fundamentals of Economic Behavior 47 2ND LAW OF ECONOMICS: Incentives Matter! One quick example may illustrate this. The “robber barons” of the late 1800s were alleged to only want riches in the oil and railroad business— and indeed they often did. But along the way they vastly increased production and greatly reduced prices of steel, oil, and transportation costs. Real wages of the employees that were “exploited” during the latter part of the industrial revolution also rose rapidly. (Estimates of real wage growth from 1890-1914 range from 8-40%. 2 ) They didn’t set out to serve the public good, yet in the end they did. The key fact is this: It is only possible to make profits over the long run by serving the customer. The pursuit of private profit in voluntary exchange often serves the public good; in fact, Adam Smith suggests it is often the most effective way to serve the public good. ROBBER BARONS? Andrew Carnegie, the steel magnate, cut steel rail prices from ~ $50 to $10 in thirty years, greatly reducing the cost of rail transportation. J.D. Rockefeller drove the price of a gallon of oil from 58 cents to 8 cents, enabling the use of oil for the poor. Cornelius Vanderbilt, without government subsidies as some of his competitors did, significantly reduced the cost of transatlantic transportation. Travel costs were as low as $30 per person, supporting immigration to America. Yes, these people grew tremendously rich…but only by providing goods and services that served others. Further, this service to the “common good” is not planned for by anybody. One of my former professors liked to use this example: “Youwant to see amiracle?Go to the grocery store in January andyou’ll find a cucumber! No one ever gave an order for that to be there and yet without fail we can count on fresh vegetables in winter in our supermarkets. No one set out in advance to plan this outcome, no order was ever given by government planners, and yet we have vegetables and fruit in winter.” The economist F.A. Hayek once said that if man had intentionally designed the market system, it would be one of the greatest accomplishments in human history. Yet no one planned it, therefore we fail to see its genius. Just because no one on earth directed or planned this outcome, of course, doesn’t mean it wasn’t part of God’s sovereign plan. As the introduction to this chapter suggested, God has planned for individuals to cooperate with each other and for all to benefit. The unplanned social order of the market allows It is only possible to make profits over the long run by serving the customer.