At times I find it hard to pin down what’s wrong with out current economic system. After all, since the industrial revolution we have multiplied our production capacities. Granted, that came at the cost of some serious environmental degradation, but that’s not something that is specific to capitalism, but rather of industrial expansion in general.
There’s one thing that I find really absurd about the current economy: We make things artificially valuable, and increase their prices by making them scarce, while spending significant efforts on keeping them scarce. I usually talk about digital goods in this context. We could just continue to create lots of digital goods upon digital goods and distribute them for free. But most people don’t do that, because it’s hard to get economically rewarded for giving away free stuff. Besides digital goods there are also material examples, although they are harder to find. Sometimes, food surpluses get destroyed to increase prices. This has happened relatively recently.
Efficiency not wanted?
It is paradoxical: The more productive we become, the harder we need to work in order to make stuff artificially scarce, so that we can make profits by selling it. Naturally, more efficient production methods should reduce prices. And low prices should be a good thing. Ideally, prices should drop to zero. But people can’t make profits with near zero prices, so there are strong incentives against actually approaching near zero prices. Wait, wouldn’t the competition still try to win out with even lower prices? Artificial scarcity of digital goods could be subverted by reselling those goods for lower prices or giving them away for free. That does happen, but it usually only legal, if you have the copyright on those goods. Copyright acts as artificial obstacle to efficient trade and distribution. Shouldn’t market libertarians insist on abolishing copyright, since it enables artificial monopolies? Well, some of them do, but they are a small minority.
The relationships between value and price
There is a fundamental problem with our current level of economic thinking in that we tend to conflate value with prices. The problem is that with artificial scarcity value of prices enter a reciprocal relationship, instead of a proportional one: The scarcer a product is made, the higher its market price can rise – in accordance to the laws of supply and demand. A state in which extremely high quality goods were free would be quite preferable to most people, and be actually considered as very valuable, but our current economic metrics would return a market price of zero for such a situation, which is wrongly equated with a bad state of the economy. A real move towards abundance would look like an economic contraction when only looking at metrics like the GDP, for example.
How to measure value?
And that’s quite an uncomfortable insight. Measuring GDPs is something we can do, but if they turn out to measure the opposite of value, instead of true value, at least partially, what should we rely on, instead? This is far from being an hypothetical or academic problem. For example the US health care system is horribly expensive, contributing a large part to the GDP of that nation, while still being extremely inefficient, because is keeps good health care quite scarce, at least in contrast to the more publicly funded health care systems of most other nations.
Any nation could inflate its GDP by trying to make good services as scarce as possible, so that people are forced to purchase them for horribly high prices. And then they can boast about how great they economy is. Yeah, right.
Are there better ways to measure economic performance? What about looking at the prices of different kinds of goods? If they go down, that should be a sign of economic efficiency. If they go up, then the economy is in trouble. When they go down to near zero, we live in abundance. Instead of prices expressed in money, we could alternatively look at the number of hours we need to work on average in order to produce or purchase a certain good or service. Monitoring the price levels of different classes of goods and services would help us to gain a clearer understanding into what direction our economy is moving.
The special case of work
There’s still a nasty issue with that approach: What about the price of work? Wouldn’t we have to see sinking costs of work as good thing, too, due to the previous considerations? Perhaps not if we rely on work time as measure of the costs of work: How many hours do I have to work to afford one hour of work of a specialist? If that number drops, more people can afford specialist services, and it will turn out to be a more egalitarian society. Of course, we could ask how many minutes a specialist does have to work to afford the services of simple workers. If that number drops, specialists can afford more supportive services, and society will turn out to be more unequal. What is the right measure, then? Maybe the correct conclusion is to accept work as very special economic entity that deserves special treatment. It might make sense to consider the average or median work (time) cost required for producing or purchasing certain goods, but comparing different kinds of work with one another might be problematic as macroeconomic measure – which is a conclusion that seems to stand at odds with the idea that we live in a service economy.
The median work hour cost metrics
Well, all this boils down to is to measure the prices of various goods (and not services) in terms of average (or better median) work hours (= hours of the median earning workers) required for producing or purchasing them. Such metrics would actually be naturally adjusted for inflation, as a positive side effect. Additionally, they would be a pretty robust indicator for economic progress or regress.
- When relinquishing GDP as relevant measure, related metrics like the velocity of money, or the public expenditure quota become relatively uninteresting and meaningless, too
- Monetary and income inequality are still interesting metrics, though
- The work time metrics would still be suitable, if we decided to get rid of money for some reason
- How does rent factor into all of this?
- Why do people still care about things like the GDP? Is it really so hard to use more meaningful alternative metrics?
- What if people care about material goods less and less? What macroeconomic orientation would still remain?