Amish Economic Incentives 1

Amish Economic Incentives And Their Relation To Cultural and Religious Standards Lucas Van Cleef College of Wooster

Amish Economic Incentives 2

Much like the members of Islamic communities around the world, the Amish make no distinction between their spiritual and temporal lives. Adhering to strict cultural and religious standard, the most potent defense of Amish community values from the erosion by the influence of the modern world has been their close-knit and isolated communities. Though this isolationist way of life was able to endure for over a century, the increasing number of Amish owned non-agrarian firms established since the 1970s has provided incentive for many Amish entrepreneurs to seek conventional forms of financing from both within their community and from the non-Amish world surrounding them. Though many Amish make use of conventional financial institutions, the way in which they do so is greatly influenced by their traditional values. The love of money is the root of all evil. (1 Timothy 6:10) We are reminded of this biblical proverb by Anabaptist pastor Elmo Stoll in Kraybill, Nolt, and Weaver-Zercher's (2010) book. Since Amish see themselves as being on a journey towards eternity, the lack of desire for earthly wealth is a cornerstone of their lifestyle. In his own book Stoll goes on to further explain why wealth and material possessions have no importance the Amish: If we were meant to stay here it would make sense to accumulate and enjoy all the earthly comforts. But this is vanity. We came into the world with nothing, and we are going to leave the same way. (as cited by Kraybill, Nolt, and Weaver-Zercher, 2010, p. 123) Despite this idealistic view shared by all Amish that personal wealth and possessions have no true value, the harsh reality of living in the civilized world is that a certain amount of wealth must be accumulated to meet basic needs. Kraybill and Nolt (2004) explain that while for generations, the cultural norm for the Amish was that almost every man supported his family through farming, the advent of mechanized farming has cornered the competition and lowered the price of farm goods too much for it to be a viable way of living for most Amish. In modern times the initial investment required

Amish Economic Incentives 3 by an Amish man to start a farm can exceed one million dollars, which is difficult, if not impossible, for a young Amish farmer to pay off. Because of their inability to rely on traditional agrarian occupations, many Amish have found incentive to enter a variety of other businesses that require a smaller initial investment and have a better chance of being profitable, and consequently have found and increased need for financial services. This shift can be seen in the fact that over 1500 shops have been opened by the Amish since the 1970s. In their book, Kraybill and Bowman (2001) introduce some of the core social institutions that affect every aspect of daily life for the Amish. The first of these institutions is Ordnung, which literally translates from German as rules and discipline. In the context of Amish culture, Ordnung refers to the Cluster of regulations that defines expected behavior and imparts the group's distinctive identity. (Kraybill and Bowman, 2001, p. 179) Like Sharia law in Islam, Ordnung governs the way that the Amish approach all facets of life, and failure to adhere may result in the most grave punishment administered by Amish communities, excommunication. A second governing concept in Amish culture that Kraybill and Bowman (2001) introduce is Gelassenheit. Also a German word, Gelassenheit translates to yielding and surrendering to higher authority. While modern culture promotes personal achievement, advancement, and recognition as values, the values that are associated with Gelassenheit are hesitation, slowing down, backing down, and giving up. Giving up refers to giving up one's stubborn will for the welfare of the community. (Kraybill and Bowman, p.182) This definition of giving up is immensely relevant to the ways in which the Amish approach finance. Concordant with their community centered way of life, Kraybill, Nolt, and Wesner (2010) introduce in their article a common institution throughout many Amish communities known as mutual aid. Mutual aid refers to the network of reciprocity within an Amish community in which Amish consider it their civic duty assist one another with the acquisition of material needs. Because of this

Amish Economic Incentives 4 informal network of assistance offered by Amish to their co-ethnics, the Amish reject conventional insurance policies. The lack of necessity for insurance policies serves as a resource for Amish entrepreneurs by mitigating labor costs associated with providing health care and pensions for employees. This communally subsidized labor cost is further diminished by a 1988 Congressional decision to exempt Amish people employed by other Amish from paying into Social Security (Kraybill and Nolt 43). The reduction of labor costs due to the aforementioned social institution of mutual aid, as well as the exemption from paying Social Security taxes, is an integral factor in how the Amish conduct financial affairs. When considering productive output [Y] as a function of capital [K] and labor [L], such as in the Cobb-douglas production function [Y=K1/2L1/2], in which the total cost of production [TC] is dependent on the cost of each hour of labor a worker provides [w] combined with the cost of acquiring each unit of capital [r] [TC = wL + rK], it becomes evident how the cultural subsidization of labor costs effects the Amish entrepreneurial attitude when it comes to financing a new enterprise. Since any given desired value of productive output [Y'] is a factor of both capital and labor, having increased availability of one reduces the need for the other. Since the cost of labor for the Amish is so comparatively inexpensive, they are able to achieve their desired productive output by using more labor, and less capital. Consequently, the remainder of their production function that requires capital to achieve Y' is less than it would have been otherwise, allowing them to take out smaller loans than they would have needed to if their labor costs had not been so inexpensive. Another way Kraybill, Nolt, and Wesner (2010) explain how the culture of Amish society affects their financial dealings is the way that their communitarian way of life increases probability of success on paying back their loans. Since autonomy is not valued in Amish culture the way it is in modern American culture, business owners have privacy about the state of their firm. Should a firm struggle from inept management, or some other crisis, representatives from the church will step in and

Amish Economic Incentives 5 oversee the operation until the problem has been solved. This intense level of monitoring gives Amish entrepreneurs the incentive to put forth the required amount of effort to run a profitable business and pay back their loans. If the success of an entrepreneur in regards to paying back a loan is dependent on them putting in the require level of effort (p), then the cost of them paying back the loan must be less than the cost of them shirking their duties and not paying it. In order for this to be true, there must be some level of monitoring (m) imposed upon the borrower. If the cost of effort is assumed to be equal to (1/2) (1/m)p^2, then the cost of effort decreases as p increases. Since the Amish have little autonomy and are constantly monitored by the rest of their community, they have little cost for their effort, and are highly likely to put forth the effort required to pay back their loan. Aside from the high level of monitoring that inherently exists for Amish entrepreneurs, Craker (2011) tells us in her book that it is also a cultural value for the Amish to always pay back loans on time. Bishop Ephraim Lapp, of the Lancaster, Pennsylvania Amish community describes being late on a loan as equal to thievery because If it is due on the 10th and you pay on the 15th you have stolen money from the man for 5 days. (as cited by Craker, 2011, p. 48) Banker Bill, a banker who has done business with the Amish for 20 years in Lancaster, Pennsylvania, claims to have never lost money on a loan given to an Amish borrower. Just as Amish cultural values have highly tangible effects on their production and cost functions when seeking finance, Kraybill and Nolt (2004) illustrated in their book the ways in which it effects their methods of securing start up capital. While most Amish businesses start on shoe string budgets using personal savings and limited amounts of borrowed money, (p. 46), they nonetheless still often require the acquisition of borrowed capital. Consistent with their strong communitarian tendencies in all other aspects of life, Old Order Amish have traditionally sought private loans from family or community members to finance new operations. The incentive for obtaining these inter-community

Amish Economic Incentives 6 loans instead of conventional bank loans stems from the largely emphasized sense of community that the Amish possess, but also from the fact that these loans are typically offered at modest interest rates. These interest rates are able to remain modest due to the non-risky tendencies of Amish entrepreneurs, the sense of reciprocity that members of Amish communities feel for one another, and the lack of desire by Amish to become exorbitantly wealthy. This illustrates another way in which the cultural values of the Amish effect the production functions of their entrepreneurs by lowering the cost of obtaining capital. Acknowledging the risk averse values of Amish culture is important in understanding why interest rates should be low on loans to Amish entrepreneurs. If The ideal interest rate (Rb) that a money loaner should set is a function of the portion of borrowers who are risk averse (q), the probability that a risky borrower will pay back a loan (p) and the expected return of any given borrower of an unknown risk type (k), then the interest rate that should be charged by money loaners in order to break even can be determined by the function: Rb = k/[q+(1-q)p]. Since cultural conditions dictate that almost all Amish borrowers are going to be risk averse, and money loaners should not be motivated by large profit, it is easy to see why the cost of borrowing capital within an Amish community should be remarkably low. While the reduced costs of both labor and the acquisition of capital explain why the formation of new Amish businesses necessitate the borrowing of smaller loans than most, there are other cultural incentives for Amish entrepreneurs to take out smaller loans than their non-Amish counterparts. Culturally the Amish prefer slow expansion and stable growth and business, and shy away from get rich quick business models. (Kraybill and Nolt 48) This cultural practice reflects the agrarian heritage of the Amish, roots back to the days when most Amish men farmed for their livelihood, which is an inherently long and methodical process. Because of this preference for slow and stable growth, Amish entrepreneurs prefer to take out small loans to start their business and then slowly expand. This quality

Amish Economic Incentives 7 of Amish borrowers reduces their risk of defaulting on loans, which in turn puts even further downward pressure on the cost of obtaining capital. The Amish preference for low-risk business models and slow but steady expansion is consistent with what Craker (2011) refers to in her book as typical agrarian conservatism. (78) While this conservatism is evident in the way Amish conduct business, and their approach to taking out loans, it is even more so in the way that saving money is so highly valued in their culture. This affinity for saving is described by Craker (2011) as being directly related to the Amish aversion of risk, but also serves as a safeguard for unforeseen future inconveniences. Craker (2011) explains in her chapter on saving that one of the widely acknowledged incentives for Amish to strongly favor saving their money roots from their agrarian culture. Since the operational sustainability of running a farm is so susceptible to unpredictable circumstances, such as averse weather conditions or the destruction of crops by a multitude of means, saving money is a way of hedging the inevitable bad year. (Craker, 2011, p. 78) This acknowledgment of and preparation for unseen future perils resonates one of the aspects of Gelassenheit, which is the quiet acceptance of whatever comes. (Kraybill and Bowman, 2001, p. 182) As Kraybill, Nolt, and Weaver-Zercher wrote in their book, Amish spirituality intersects with the world at almost every turn. (p. 124) It is easy to see through these writings that the cultural and religious standards of the Amish have pronounced effects on the way they conduct themselves financially. Despite having relatively little written about them, these effects are easily seen in the ways that Amish borrow, invest, and save money. While the financial affairs of Amish, like those of the Islamic community, are affected by their religion, this influence is not expressed through the formation of financial institutions alternative to conventional banking, but rather through trends in how the Amish make use of these institutions.

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Works Cited Armendariz, Beatriz, and Jonathan Morduch. The Economics of Microfinance. Cambridge, Mass.: MIT Press, 2005. Craker, Lorilee. Money secrets of the Amish: finding true abundance in simplicity, sharing, and saving. Nashville: Thomas Nelson, 2011. Kraybill, Donald. On The Backroad to Heaven: Old Order Hutterites, Mennonites, Amish, and Brethren. Baltimore: Johns Hopkins University Press, 2002. Kraybill, Donald, Steven Nolt, and Erik Wesner. "Amish Enterprise: The Collective Power of Ethnic Entrepreneurship." Global Business and Economics Review 12 (2010): 3-18. Kraybill, Donald B., and Steven M. Nolt. Amish enterprise: from plows to profits. Baltimore: Johns Hopkins University Press, 2004. Kraybill, Donald B., Steven M. Nolt, and David Zercher. The Amish way: patient faith in a perilous world. San Francisco: Jossey-Bass, 2010.