Life's busy, read it when you're ready!

Create a free account to save articles for later, keep track of past articles you’ve read, and receive exclusive access to all RP resources.

Search thousands of RP articles

Articles, news, and reviews that celebrate God's truth.

Get Articles Delivered!

Articles, news, and reviews that celebrate God's truth. delivered direct to your Inbox!

A A
By:

THERE’S NO FREE LUNCH – an economic principle Christian teens (& adults) need to know

Small revolutions in schooling are occurring across the world. From homeschooling to microschools, many parents find themselves wanting more for their children in terms of education.

Resources are available for independent schooling now more than ever, but some subjects remain difficult to tackle. My own field of economics remains elusive for many educators. Part of the difficulty is that many people don’t know what economics actually is. Many think economics is just composed of principles budgeting and investment. This view of economics and finance being the same is common, but it’s wrong.

Instead, economics considers how people interact in a world where there are limited means but unlimited desires. The study of this interaction and the rules that govern it is of fundamental importance for anyone who wants to understand human flourishing, politics, or any topic of social importance.

My high school economics teacher used to say, “everything goes back to economics.” Math and science, for example, are the tools people use to accomplish their goals. But the reasons they use these tools are economic.

And I can’t think of a better starting point for understanding economics than the concept of opportunity cost.

What is an “Opportunity Cost”?

One of the most famous phrases in economics is, “there ain’t no such thing as a free lunch.” This phrase is meant to illustrate the always present role of opportunity costs.

Whenever you make any decision to do anything at all, you’re essentially choosing between two possibilities – your best option and your second-best option.

Consider an example. Molly has three offers of how to spend her Saturday evening. She can study for her college algebra final exam, she can babysit for 3 hours at a rate of $15 per hour, or she can hang out with her friends.

Let’s say her favorite option is to study, her second favorite is babysitting, and her third pick would be having out with friends. Since studying is Molly’s most urgent desire, she decides to allocate her time that way.

But what did she give up? You might be tempted to say she sacrificed $45 and time with friends, but that isn’t really the case. After all, Molly couldn’t have babysat and spent time with friends. So even if she hadn’t studied, she would still have only been able to do one of these other options, so in a very real sense that’s the only option she was sacrificing.

In this case, her second favorite option would have been to earn $45 babysitting. So, the “opportunity cost” of Molly’s studying is $45. To say it again, the opportunity cost is the option you value second highest and sacrificed when you decide to pursue your first choice.

In this light, we can see every action has a cost. Time spent resting could be time learning or fixing up the house. Another hour of overtime at work is one less hour at home with family. Every time you say yes to one opportunity, that prevents you from accepting another. There is no free lunch.

Why does it matter?

The concept of opportunity cost is important for people to understand for several reasons. First, opportunity cost helps us understand some of the hard-to-see downsides of certain policies.

Consider the income tax. If a government increases the income tax from 25% to 40% this has major ramifications for someone deciding whether they want to work an extra week during the summer for $1,500. With a 25% tax rate, the person takes home $1,125, while at 40%, the person only takes home only $900.

Now let’s say this person values their relaxation time as being worth about $1,000 a week to them. Then this tax policy will make a big difference. The opportunity cost of working this week will be the equivalent of what this fellow valued for his time off: the opportunity cost for working would be $1,000.

Now with a 30% tax rate, that extra paycheck is worth more to the person than the extra week off ($1,125 is greater than $1,000). But with a 40% tax rate, suddenly the relaxation is worth more ($1,000 is greater than $900)!

So, by understanding the concept of opportunity cost, we can also understand that higher income taxes will mean people will work less.

Even free comes with a cost

Opportunity cost has practical usefulness too. Why is it that sometimes deals sound too good to be true? It’s because implicitly, we all have some understanding of opportunity cost. If a person offers to give you a free car, his opportunity cost is, at minimum, keeping the car for himself. Why would he give it away rather than keep it? Is it possible he is getting something from you?

Something having a price of zero dollars is not the same as something being free. When my local ice cream shop offers “free” ice cream, I know there’s going to be a line going out the door. When I take into account the fact that my time is valuable, I realize waiting half an hour in line for free ice cream could have a higher cost than paying the regular $3 but without waiting.

To learn more…

If you’re interested in learning more about opportunity cost and how it applies in the world, I highly recommend reading Economics in One Lesson. Author Henry Hazlitt does an excellent job of applying the logic of opportunity cost, and the book will only cost you your time (as it is a free download at fee.org/resources/economics-in-one-lesson). And trust me when I say, it’s worth the opportunity cost.

Peter Jacobsen is an Assistant Professor of Economics at Ottawa University and the Gwartney Professor of Economic Education and Research at the Gwartney Institute. He has previously written for both the Foundation for Economic Education and the Institute for Faith, Works, and Economics.

ADVERTISEMENT

"Be Fruitful and Multiply" tour comes to Albertan April 19-22

Families are having fewer babies, and the world’s population is expected to peak and then decline later this century. The world isn’t prepared for the impact that this is going to have. However, what may be the greatest challenge of this century can also be a huge opportunity for the Church to shine…. if we embrace the blessing of children, and are prepared to raise them faithfully.

In this presentation, Reformed Perspective’s Mark Penninga will unpack data, history, and God’s Word to make the case for embracing the gift of children with open arms.

WHO IS THIS FOR?

Ages 16-116, single or married, children or no children, these presentations are suitable for all mature Christians.

WHEN AND WHERE?

Edmonton: April 19 at 7:30 pm at Immanuel Canadian Reformed Church

Barhead: April 20 at 7:30 pm at Emmanuel United Reformed Church

Ponoka: April 22 at 7:30 pm at Parkland Reformed Church

ADVERTISEMENT

Enjoyed this article?

Get the best of RP delivered to your inbox every Saturday for free.



Economics

The $15 minimum wage - good intentions are not enough

In the US, the latest COVID-19 relief package has re-awoken the debate on minimum wage increases, and that policy conversation is spilling over into Canada, Australia, and much of the Western world too. Often policy proposals put Christians in difficult territory. The Bible was not written during a time where every person would be personally accountable for participating in the governing of a nation. There’s very little in the way of advice to voters on specific policies. However, this doesn’t mean Christians can’t form educated opinions about policies like the minimum wage. To do so, believers can evaluate the fruits of the policy.  Good intentions One way to evaluate whether the minimum wage increase would be a good thing is to see if the intended fruits of the policy are good and analyze whether the actual fruits will match the good intentions. Supporters of the minimum wage increase are ostensibly trying to help lower the level of poverty. Higher wages for the lowest wage workers could give them a chance at a better life. This intended fruit appears to be good. Lowering poverty seems to be unambiguously good. And a reasonable interpretation of Matthew 22:20-22 could claim it’s within the state’s right to take money from business profits and give it to workers. Combining this logic with verses like Psalm 41:1 could make a powerful case for this proposal. A Christian might be tempted to stop thinking here. Perhaps the increased cost to businesses is worth the poverty alleviation. However, even if someone does accept this trade-off, the biggest problem with increasing the minimum wage lies more in the results than intentions.  Bad results Good intentions are not enough to eliminate poverty, as evidenced by the American “war on poverty,” now entering its 58th year. The minimum wage law does not guarantee every person a job at $15/hour. In actuality, what the minimum wage law does is make it illegal to gainfully employ any worker whose skills don’t bring in $15 of hourly revenue. Economists refer to the revenue an additional worker brings in as “marginal revenue product.” For any worker with a marginal revenue product less than the minimum wage, employing them would either mean making a net loss on the hire or breaking the minimum wage law. Businesses must make a profit. If a business fails to do so, it will eventually have no option other than shutting its doors. If businesses fall behind competitors in making a profit, they also run the risk of being driven out of business. As such, hiring decisions in business are based on whether they generate profit. If a salesman, for example, sells $8 worth of products an hour, and he gets an offer for a wage of $7.50, the company finds hiring him to be worthwhile. However, a company that pays a salesman who sells $8 worth of products per hour a wage of $15 is losing $7/hour. Companies that hire this way will be outcompeted by those who don’t. So, what is the result of a minimum wage? Workers who don’t make their companies enough to warrant getting paid the minimum wage are fired. Economic theory suggests this, and a recent working paper from the National Bureau of Economic Research surveys studies on the topic and shows the research overwhelmingly finds that unemployment results from the minimum wage. Not only do some workers not have their poverty alleviated, but the workers with the least opportunity are more impoverished. In fact, evidence suggests this unemployment is imposed on minority groups and women disproportionately. The problems don’t stop there. Unemployment increases, but some workers who previously made a minimum wage will keep their jobs. Aren’t these workers made better off? Not necessarily. If a worker was previously willing to work a job for $8 (as evidenced by the fact that they accepted the job), but now the same worker is being paid $15, this doesn’t mean they are $7 better off. Why? Well, since the employer is mandated to pay a higher wage, they are going to try to get the most work out of the worker possible. Workers might find that these new expectations and pressures make the job less enjoyable than if they were paid an $8 wage. Also, if you’re getting paid more than you would have needed to accept a job, and there are a lot of unemployed replacements waiting, you’re going to be willing to accept a less pleasant job to keep that high-paying job. A higher minimum wage gives workers less bargaining power and, as such, will lead to workers taking on jobs with bosses who don’t need to offer them as much dignity. This is not to say all bosses will take advantage of this position, but it seems unrealistic to assume none will. In sum, if we judge a policy by its fruits, a $15 minimum wage will increase the poverty of those with the lowest opportunity, and it carries the possibility of work becoming less dignified for those lucky enough to keep their jobs. Despite potentially good intentions, the results speak for themselves. Instead of giving more dignity to work and lifting people out of poverty, the minimum wage exacerbates both problems.  Bootleggers, Baptists, and bad intentions For argument’s sake, I’ve assumed good intentions on the part of minimum wage policy advocates to this point. However, it’s important to point out that the minimum wage is utilized as a tactic by racists and labor unions to cut out the competition. Stanford economist Thomas Sowell has chronicled how a Canadian minimum wage has racist roots. Sowell argues: “In 1925, a minimum-wage law was passed in the Canadian province of British Columbia, with the intent and effect of pricing Japanese immigrants out of jobs in the lumbering industry.” A largely automated company would love to increase the labor costs for its competitors. The results of the Australian minimum wage were similar. Sowell points out: “A Harvard professor of that era referred approvingly to Australia’s minimum wage law as a means to ‘protect the white Australian’s standard of living from the invidious competition of the colored races, particularly of the Chinese’ who were willing to work for less.” Whenever Christians support policy, they should take care to avoid contributing to the “Bootleggers and Baptists” phenomena. This phrase describes how, when the US passed alcohol prohibition, the two major groups who supported it were Baptists who opposed alcohol and illegal alcohol bootleggers who stood to profit if legal alcohol distributors were closed. In supporting prohibition, Baptists supported the profits of bootleggers with bad intentions. In the cases Sowell cited, the “bootleggers” were racist who wanted to eliminate minority labor competition. Today, bootleggers can come in the form of a business like Amazon, which, as a largely online company, doesn’t rely on laborers who make less than $15 per hour. Since Amazon already pays its warehouse workers $15/hour, an increase in the minimum wage would do little to impact their costs, but it would raise the costs to one of Amazon's biggest competitors – Walmart. Bootleggers could also be skilled labor unions that lobby for the minimum wage to limit the competition from unskilled, but lower cost, labor. In these cases, the special interest groups intend the policy to prevent less fortunate low-skill laborers from having jobs. To make a positive difference in the world, Christians must consider more than their intentions behind policies. Instead, it is part of our responsibility, given the form of government God has allowed us to participate in, to be educated about the results of policy. In the case of raising the minimum wage, the results are in. Christians need to do better if we want to help the suffering of “the least of these.” Peter Jacobsen is an Assistant Professor of Economics at Ottawa University and the Gwartney Professor of Economic Education and Research at the Gwartney Institute. He has previously written for both the Foundation for Economic Education and the Institute for Faith, Works, and Economics....