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Reflections: Saving and investing

Markets and economic faith
By Scott Vander Linde

One of the essential elements of a capitalist system is the reliance on markets: to allocate products and services, to determine wages and incomes, and generally, to ascribe value to resources. Under the correct conditions—competition involving a large number of sellers and buyers, no costs or benefits realized by those outside a given transaction and complete information, among others—say economists, markets’ outcomes result in an efficient allocation of resources with little or no outside influence.

Often financial markets—where the trading of stocks, bonds, currencies, derivatives and other financial instruments occurs—have been viewed as the epitome of correct conditions for effective markets, so much so that even after the nearly cataclysmic financial meltdown in 2008, many expressed great hesitancy to do anything substantial to place checks and balances on these markets. This view seems to express nothing short of a faith in markets: If these markets are viewed as failing to function without intervention, what about all of the rest of the markets where less ideal market conditions are agreed to exist?

For Christians, it seems appropriate to step back and ask, in what or in whom should our faith lie? And what is the ultimate role of markets, or for that matter, governments and their regulations over markets, or any other man-made institution or enterprise?

As with all of what God has created, these institutions, when working appropriately, should act as tools to assist people to better serve our God by better serving our fellow earthly inhabitants. We should evaluate market, government and business performance by the standard of how well they do this, not by some other ideological framework. Faith that markets rarely do wrong—or that if they do, they are still better than any alternative—really got us into the financial mess we are in. Even the father of our faith in markets, Adam Smith, was explicitly cautious about this mindset.

And it should be clear that financial markets were and are fraught with some of the same phenomena that require the economic workings of government and other watchdogs. If there were effective competition—many sellers—we would not be having drawn-out discussions about “too big to fail.” And if information were in fact complete, many of the market valuations of derivatives, houses, credit risks, etc., would not have been so misjudged. And clearly, many who did not participate directly in the markets that melted down, in the U.S. and abroad, have been directly and harshly affected by these transactions, via unemployment, loss of homes, need to fund industry bailouts, etc.

In the end, markets have an important role as one of the many institutions that can assist people in stewarding God’s resources. But markets, like all man-made and influenced institutions, are fallible and an inappropriate object of faith.

Questions for reflection:

  • Do you see evidence of “faith in markets” in the rhetoric of financial news reports, talk-radio shows and other media presentations?
  • In what ways have you perhaps inappropriately placed too much faith in markets in your financial and economic life?
  • How would our economic and political discussions and economic policies be different if we viewed all institutions as fallible?

—Scott Vander Linde, Class of 1980, Professor of Economics, Calvin College

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