How often have we heard in hard economic times about our patriotic duty to spend more money? If only we would all go out and buy things, anything really, we could pull out of this recession. On the one hand, we want to commend paying down debt and saving. On the other hand, if all we do is save our economy will stall out. It’s called the paradox of thrift. Frugality may be good for us, but it is bound to be bad for everyone else.

I’ve heard this kind of reasoning often. And it has always struck me as morally and economically dubious. Is the private virtue of thrift really a public vice? Not at all, argues David Blankenhorn in an article entitled “There is No ‘Paradox of Thrift’”. He gives five reasons why thrift is not bad for the economy. He lists them in ascending order of importance.

5. Saved money is likely to be productive money. Americans are not in danger of saving too much. We are saving more, but even if the saving rate reaches 7 or 8 percent by the end of the year, this is roughly the same rate we’ve averaged since 1930. By the same token, economists universally agree that racking up debt and saving nothing is a recipe for long term, wide-spread economic disaster. Right now Americans have too much debt. Paying down this debt in the short term may seem harmful to the economy, but will help the whole country in the long term. Those who have fewer debts and more savings are in the position to invest in new business ideas and ventures. And investment, not consumption, is the lifeblood of the economy.

Along these lines (and this is a point Blankenhorn doesn’t make), we need to remember that people today don’t tend to save money by hiding it under their mattress. We put it in a bank or buy stocks or bonds, or entrust out assets to a financial adviser who invests the money for us. In other words, our saved money is usually invested somewhere else. It’s being spent even as we are saving it. That’s the genuis of a (healthy) credit system and free market capitalism.

4. For individuals and families, it’s always wise to live within your means. We aren’t helped, and the country isn’t either in the long run, when people spend recklessly. When people stay within their means and save, they usually get richer. And rich people spend and invest more than poor people. Families getting their financial houses in order are not the problem; they are the solution.

3. Governments, not individuals or families, are responsible for any deficit spending needed to moderate economic downturns. How much deficit spending is responsible is always the question, but most economists agree that a small amount in lean years can be justified, and governments should do it before individuals. Governments can borrow at a lower rate than individuals (as low as 2 or 3 percent) and do so more effectively.

2. Assuming that there is a paradox of thrift encourages waste. The story is told that Keynes, in a fancy hotel, once dramatically pushed a stack of towels on the floor because he believed it would stimulate the economy. The thought being, “I just created more work for people” (he was serious). But this is not job creation by entrepreneurial activity. This is waste, plain and simple. Not every dollar spent is real enterprise. Spending our money wisely is better for productivity and does more to cause the whole economic pie to grow.

1. Properly understood, “thrift” means the ethic and practice of wise use. Thrift is more than simple abstinence. Etymologically, the thrifty person is the thriving person (sounds like Proverbs doesn’t it?). When we are wise with our money, careful, and conservative, we tend to make the best use of the resources we have, whether that be time, money, health, possessions, or oil and coal. And when we maximize the effectiveness of what we have, we increase productivity. And this is how economies grow; they get more production for less. The economy doesn’t grow by paying people to dig holes and fill them back in again. The economy grows when the needed ditch digger figures out how to build better ditches, in a faster time, for less money. That’s called thrift. And it’s not a bad thing.

So don’t worry about being frugal, saving money, being careful about your purchases and getting out of debt. You’ll be better off if you do these things, and in the long run, the country will too.

When I’m not reading history or theology I am often reading economics. I find the interplay between Christian commitment and economics fascinating, and filled with misunderstandings. If you’ve ever had questions about capitalism, and in particular whether or not a generous Christian can really support capitalism, I would encourage you to read Jay Richards’ new book Money, Greed, and God: Why Capitalism is the Solution and Not the Problem. Whether the title makes you say “Amen” or makes you want to roll your eyes into the back of your head, I would recommend this book as the best, most easily accessible, defense of capitalism from a Christian perspective.

Here is an interview with Jay Richards I conducted by email.

1. Tell us a little bit about yourself. Where are you from? What is your current vocation? Are you married? Do you have children?

I was born and raised in Amarillo, TX. I am married to Ginny (we just celebrated our eighteenth anniversary), and we have two lovely daughters, Gillian (10) and Ellie (6).

I worked full time at Discovery Institute for 7 1/2 years (in Seattle) and at Acton Institute for three years. We attended a CRC Church in Grand Rapids. At the moment, though, we’re out in the Seattle area while my wife finishes some course work for a masters degree. I’m getting to write full time as a Visiting Fellow at the Heritage Foundation. We’re writing a series of booklets on economic topics for ordinary, non-wonkish, people. I’m also editing a collection of articles designed to bridge the growing divide between social and fiscal conservatives. It’s scheduled to be released in late summer.

2. How did you become a Christian? What is your current church like and how are you involved?

I attended a mainline Presbyterian Church in Amarillo, and was a more or less conventional, mainline, Christian. In college, I had a crisis of faith, but was brought back from the brink through the writings of C.S. Lewis.

3. You didn’t always see the benefit to a market economy. Tell us a little bit about your story as you moved from strong opposition to capitalism to seeing the Christian virtues on the free market.

In college, I fell for many of the socialist-left ideas popular at the time (and which are regrettably making a comeback). Happily, I happened to read some good economics, including a terrific book on Marxism by Thomas Sowell. I also read Ayn Rand, which destroyed the vision of collectivism. By the time I was a senior in college, the luster of socialism had worn off. But it will still several years before I thought a Christian could defend capitalism. I suppose I had accepted Rand’s argument, but rejected the idea that greed was a virtue. I thought capitalism “worked,” but was still morally problematic. Once I read George Gilder’s Wealth and Poverty, and Michael Novak’s The Spirit of Democratic Capitalism, I changed my mind. This was actually when I was at Union Seminary in Virginia, and having to read Gustavo Gutierrez’s Theology of Liberation for the third time. I went looking for a counterbalance, and discovered Gilder and Novak.

4. In your book, you unpack eight mistakes Christians make with economics. I don’t want to make you rewrite the whole book for this interview, but could you give a one sentence description of each myth?

Here’s how I summarize the eight myths in my book:

The nirvana myth (contrasting capitalism with an unrealizable ideal rather than with its live alternatives)
The piety myth (focusing on our good intentions rather than the unintended consequences of our actions)
The zero-sum game myth (believing that trade requires a winner and a loser)
The materialist myth (believing that wealth isn’t created, it’s simply transferred)
The greed myth (believing that the essence of capitalism is greed)
The usury myth (believing that charging interest on money is always exploitative)
The artsy myth (confusing aesthetic judgments with economic arguments)
The freeze frame myth (believing that things always stay the same—for example, assuming that population trends will continue indefinitely or treating a current “natural resource” as if it will always be needed)

I linked the myths to eight corresponding questions:

Can’t we build a just society?
What does God require of us as Christians?
Doesn’t capitalism foster unfair competition?
If I become rich, won’t someone else become poor?
Isn’t capitalism based on greed?
Has Christianity ever really embraced capitalism?
Doesn’t capitalism lead to an ugly consumerist culture?
Do we take more than our fair share? That is, isn’t our modern
lifestyle causing us to use up all the natural resources?

I struggled with this taxonomy for a while, but I do think the vast majority of bad thinking on economics among Christians can be placed in one of these eight categories.

5. Do you recommend that churches offer fair trade coffee?

In general, I don’t think fair trade coffee makes sense economically (see pages 39-42), although I also don’t think it’s as problematic as many coercive strategies, such as wealth redistribution. I’ve recently learned that there is some diversity among fair trade organizations, especially among Christian ministries. On the other hand, I wouldn’t want to speak too harshly of fair trade without nuancing, since it is normally an expression of a charitable impulse, and it appears, at least on the surface, to be a market-oriented way of dealing with third world poverty.

6. On page 35, you write “Spiritually you’re better off a little mixed up about economics than indifferent to human suffering. Economically, though, only what you do is important, whatever your reason.” This seems to be a very important point for the book. What are you trying to say in these two sentences?

When I wrote: “Spiritually you’re better off a little mixed up about economics than indifferent to human suffering. Economically, though, only what you do is important, whatever your reason,” I was trying to balance but capture Gilson’s “Piety is no substitute for technique.” To me, this is one of most important points I’ve tried to make. Motivation IS important when we’re considering our spiritual state before God. It’s just that our motivation for a policy has nothing to do with the real world effects of the policy. I think that Christians often weight our (and others’) motivations far too heavily on economic matters. It’s as if we think feeling bad about poverty is more obligatory than actually doing something that helps the poor. For instance, several times in churches I’ve pointed out why minimum wage laws don’t really help the poor in the long run. I’ve never had anyone try to debunk the argument, but several times I’ve received the complaint that my argument shows that I’m not really concerned about the poor. It doesn’t of course. But even if it were evidence that I weren’t concerned about the poor, the argument’s validity (or lack thereof) would remain the same.

7. I’m sure that you will get some feedback from libertarians for your critique of Ayn Rand. Some might be surprised that you would criticize Rand in a book promoting free market capitalism. What, in your opinion, does Rand get wrong?

My criticism of Rand is central to my argument. In my view, she rightly defended free markets, limited government, and the importance of entrepreneurs, but she located those arguments in a deeply flawed atheistic philosophy. Without going into all the problems with Objectivism, I criticize her defense of greed, as well as her identification of greed with capitalism. I also argue that she confuses Adam Smith’s arguments about self-interest with selfishness. If Rand is right about capitalism, it seems to me, then it would be very hard for Christians to be capitalists. That said, as I mention in the book, Rand actually was important in helping me to purge my socialist sympathies.

8. You finish the book with “Ten Ways to Alleviate Poverty; or, Creating Wealth in Ten Tough Steps.” Why are the rule of law (number one) and a formal property system (number three) so important to the alleviation of poverty?

Rule of law is a prerequisite for a free market even to exist. A free market is not anarchy, as some critics who talk about “unbridled capitalism” seem to imply. For a market to be free, exchanges must be voluntary, which means they must be perceived as a benefit for all participants. This is what makes a free market a positive-sum game by definition. If the strong can steal from their weaker neighbors with impunity, in contrast, they have little motivation for looking for win-win exchanges. Rule of law encourages participants in a market to seek out exchanges that are mutually beneficial, even if the participants have immoral motives. That’s a good thing.

In arguing for the importance of private property and titling in raising people out of poverty, I’m following Hernando de Soto’s important arguments in The Mystery of Capital. These laws and methods allow land to become assets, to become property, to be compared with and traded with other assets. This opens up all sorts of wealth-creating activities that the first world takes for granted, but which is still lacking in much of the developing world.

9. You go out of your way to argue that the universe is divinely ordered and purposeful. What difference does this make for our approach to economics?

I think that a culture’s general beliefs about the nature of reality can have significant economic consequences. For instance, if one believes that the world is orderly and designed for a purpose, one is more likely to look for, and discover, aspects of that order. Moreover, these beliefs can encourage optimism, delayed gratification and a motivation to make the world a better place. Finally, it prevents one from reducing economics to materialism. The most important truths of economics emerge from the reality of the human person. That reality requires a theological/philosophical framework that can accommodate it.

Of course, to offset utopian tendencies, these beliefs are best tempered with a healthy realization of our flaws. In the Christian worldview, original sin fulfills this function.

10. What advice would you give pastors as they preach on money?

I would have two main words of advice for any pastor who wants to preach about money. First, look carefully at the what Scripture and the Christian tradition actually say about money. Second, get acquainted with some basic truths of economics. There are empirical realities in economics, just as there are in chemistry and physics. It’s not all hopelessly laden with ideology. And it doesn’t require advanced degrees in economics. If a pastor shows that he understands some economics, he’s much more likely to be taken seriously when he speaks prophetically about money to his parishioners. I suppose I wrote the book, in part, to help pastors do just that.

More bad news today. The U.S. economy in the fourth quarter of 2008 shrunk by 3.8%. Although economists feared the decline might be even worse, it’s still the sharpest quarterly plunge since the 6.4% dive in the first quarter of 1982.

So what’s the problem? Everyone knows that the poor economy has something to do with the “housing bubble” and the “credit crunch.” But where did these problems come from? There are lots of popular villains to choose from, be it President Bush, capitalism, Wall Street fat cats, or just plain greed. But the simplistic answers, in this case, are not the right answers. There are several factors which contributed to the meltdown of 2008.

In the book, A World of Wealth: How Capitalism Turns Profits into Progress (FT Press 2008), Thomas Donlan suggests several reasons for the housing bubble and ensuing credit crunch. The book as a whole is uneven and awkwardly written at times, but Donlan’s list of “candidates for blame” is extremely helpful.

1. Allan Greenspan. He led the Fed to lower interest rates far below normal and supplied credit to almost anyone. The result: people were borrowing at alarming rates.

2. George W. Bush. The President and the Republicans in Congress did not reign in spending.

3. Bill Clinton. His administration’s legislation and regulation made borrowing and lending easier and easier.

4. William R. Fair and Earl J. Isaac. They started a credit analysis company called Fair Isaac which is used in three out of four U.S. mortgages. Fair Isaac’s “objective analytics turned credit decision making from a character judgment into a commodity.” Now hundreds of loans with the same credit score could be packaged together and sold to another buyer.

5. Wall Street Invesment Bankers. Bankers packaged thousands of mortgages into “collateralized mortgage obligations” (CMOs). Investors and speculators started buying up the CMOs, with the promise of high returns. Investors didn’t analyze these bundles on their own. So when bankers started slipping in more and more risky mortgages (people with low credit scores, shady loans, houses appraised too high, etc.), investors didn’t take the time to figure out they were purchasing damaged goods. But as along as investors kept buying up the bundles, people kept getting loans and housing prices kept going up.

6. Rating Agencies. These are the agencies, like Standard and Poor’s, that rated the CMOs. They also believed the hype and gave the securities higher ratings than they deserved. Plus, those issuing the CMOs pay the rating agencies to rate their products. So the rating agencies have an interest in giving good ratings, so as not to bite the hand that feeds them.

7. Investors. Even though the CMOs were producing a relatively small yield on average, investors were still dreaming of high rewards. They ignored the increasing risks and kept investing anyway. That’s where the bubble came from–too much money going too fast into something that is not producing a strong return (like the dot com bubble in the 90s where investors were pouring millions into companies that had yet to make a profit).

8. Predatory Lenders. Some lenders wrote mortgages just because they could. They collected the fees (from people who didn’t need to refinance or couldn’t afford the loan) and sold the mortgage to a hungry market. Some lenders also started selling unhelpful products that put people into loans they could pay in the very short term (because of subprime interest rates), but had no way of paying in a few years once the rates automatically went up.

9. Predatory Appraisers. Lenders need appraisers to assign a high value to a home. Appraisers need the work that the lenders bring their way. The two groups were often happy to help each other out in ways that hurt the consumer. Houses got appraised far too high. As long as prices went up, people bought and sold houses, sometimes buying them just to “flip” them for a profit. Meanwhile builders were building at a record rate, figuring that they could sell their houses at the inflated prices. Eventually reality caught up with prices and the bubble burst.

10. Predatory Borrowers. The fault was not all with the bad guys in corporate America. Many borrowers lied on their loan applications. They lied about income, about assets, about employment, about credit history, about their intentions to live in the house. “As many as 70 percent of mortgages that defaulted in the first year turned out to have false information on the original loan appplication.”

The mess we’re in, as the list makes clear, is complicated. It’s not the fault of any one person or any one orginaztion. It’s the product of sinful motives and sinful actions as well as honest mistakes and unintended consequences. These things happen and they don’t allow for simplistic explanations. Or, for that matter, simplistic solutions. Beware the silver bullet. And beware the love of money.