Lessons for Capitalists from an Unexpected Source

Lessons for Capitalists from an Unexpected Source
February 1, 2005

For Christians, the parable of talents is a clear command to develop the gifts and opportunities given to us. Yet in it also lies a perhaps-surprising implication, reaching beyond the moral imperatives that mold and define a Christian.

In the parable of talents, Jesus Christ describes a master who gave a number of coins to his servants, then went away. Upon his return, the master richly rewarded the servants who invested and doubled his money, and he rebuked the one who did nothing with it. In the parable, the good servants were innovative in finding the best way to produce more talents, and they were rewarded accordingly.

The story reveals a dynamic in the master-servant relationship that is also found in the formula explaining economies, where the consumer is the master, the company is the servant, and the economy itself is the realm in which talents are measured and rewards conferred.



Consumer Is Master

An economy is rewarded with prosperity when its actors realize and embrace this relationship, giving companies the freedom to multiply their talents. Moreover, doing so requires both macroeconomic stability and fair, intense competition across all markets.

This idea is an old one, but it is given renewed impetus by a compelling new book, The Power of Productivity: Wealth, Poverty, and the Threat to Global Stability, by William Lewis (University of Chicago Press, 2004).

The simple logic reflected in the parable of talents flies in the face of many current ideas about what drives economic growth and more particularly about how best to help impoverished nations. These mistaken ideas give rise to policies such as protection of domestic markets, government intervention to prevent layoffs and business failures, high minimum wages, and the artificial direction of capital flows to poor countries--all measures designed to coax an economy into growth.

In fact, none of these policies recognizes the "consumer is master" concept; thus, none of them results in the growth for which they were designed. Hence, none of them ought to be any country's top economic priority.



Innovation Is Key

Lewis's conclusions, drawn from a 12-year study of macro- and microeconomic data from 13 different countries, point the way toward better policies. Using information from 118 individual microeconomic industry studies reported by the McKinsey Global Institute, where he was founding director, Lewis observes a concrete connection between productivity and prosperity in all types of economies, from rich to poor.

The formula is straightforward: "Productivity is simply the ratio of the value of goods and services provided consumers to the amount of time worked and capital used to produce the goods and services," Lewis says.

But there's more. Lewis reminds us of the higher truth that "the goods produced have value only because consumers want them." Consumer behavior as a response to intelligent productivity is the essential ingredient to the success of an economy (or a business), regardless of whether that economy's participants or its overprotective government know this. Thus, nations must focus on creating the conditions in which creative innovation flourishes and consumer demands are met.

Lewis points to the experience of the United States in the 1990s to show why these conditions are essential in the quest for prosperity. "In the second half of the 1990s, only six of the 60 sectors making up the U.S. economy accounted for about 75 percent of the total gross productivity growth acceleration," he writes.

Each sector's growth, Lewis notes, depended on changes associated with innovation. One sector, security brokerage, improved by catering to Internet-savvy consumers: It developed online securities trading. In retailing, Wal-Mart captured "a sufficiently large market share by 1995 that [its] competitors faced a choice of either getting as good as Wal-Mart or going out of business."



Government Steps Aside

Like the servants mentioned in the biblical parable, companies should be free to discover the most innovative business plan. Governments must stay just close enough to their countries' economies to ensure macroeconomic stability, providing a firm foundation for steady growth, yet they must step far enough away to allow fair and tough competition, providing a do-or-die incentive for companies to become more efficient.

When governments don't do this, the result looks like the milk market in the Japanese food-processing industry where, Lewis reports, "productivity is only at 39 percent of that of the United States." Since Japan's Large-Scale Retail Location Law discriminates against stores that occupy more than 1,000 square meters, retailers along the lines of a Sam's Club or a Costco remain scarce. Smaller stores naturally do not buy large quantities, resulting in local producers choosing to deliver three times a day because they have no incentive to invest in chemicals that would allow milk to be safely delivered over longer distances.

While Japanese customers would almost certainly prefer cheaper milk, they do not have the choice. Meanwhile, the Japanese economy continues to reflect this poor productivity.

What happens when governments and economic actors do the right thing? Here, too, the Bible has a useful insight: "For to every one who has, more will be given, and he will have abundance; but from him who has not, even what he has will be taken away" (Matthew 25:29). Under the right conditions, businesses that don't serve customers well by providing valued products at competitive prices will not survive.

The rest of the economy, by contrast, will reap many rewards: efficiency, productivity, prosperity (especially in poverty-stricken nations), and most importantly, development of that divinely endowed, precious gift to humanity: creative ingenuity.


Acton Institute intern Emily Brennan attends the College of the Holy Cross in Worcester, Massachusetts. An earlier version of this essay was first published as an Acton Commentary on July 21, 2004. It is available on the Acton Institute Web site at http://www.acton.org/ppolicy/comment/article.php?id=208.