Inflating prices by destroying value

Discourse Society
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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.

Artificial scarcity

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.

General observations

  • 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

Open questions

  • 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?
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The word “profit” in economic texts usually means the difference between the price a consumer pays and the costs the owners incurred, but it is common for people to think of it as just generally “getting paid”. This can create massive confusion during reasoning since being paid for work is a cost of production.

So within my reply I will use the word profit to mean the difference between price and cost.

I have thought about this issue for a very long time and noticed a strong inverse relationship between profit and property. Profit ceases to exist when the consumers are the owners of the Means of Production and accept the Product itself as ROI.

For example, if a person owns the Means of Production (let’s say an Apple tree), and accepts the product itself (Apples in this case) as the return on that investment, even if they hire other people to do all the work, the price they pay in the end is simply the total costs of production and profit does not even exist since there was no sale, and so there is no difference between price and cost.

We can scale this up to multiple owners owning the Means of Production (such as an Apple orchard), and if those investors are simultaneously consumers of that particular product (Apples), then we do not need to sell the product after it is produced since it is already the property of those who will use it.

Profit is zero in this scenario (actually undefined) and yet all investors are satisfied because the product itself compensates them for their risk.

This arrangement allows us to create businesses that do not need to seek scarcity, can operate indefinitely at zero profit, and have no incentive to hope other businesses fail.

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Thanks for your thoughts and perspective. I don’t see how they address my points exactly (perhaps you could refer to what I’ve written more specifically in order to help me with that), but they are certainly interesting enough to discuss in more detail, in any case.

That is not especially surprising. Low profit margins are a sign of efficient markets. The more competitors act within a market, the higher the pressure becomes to reduce prices. Lower prices mean lower profit margins, unless companies manage to innovate at the same time, so that the costs of production are lowered, too. Such innovation can temporarily increase profit margins for the company who does the innovation first. But as soon as other companies manage to innovate in similar, or other ways, they will be able to lower prices in order to stay competitive, so profit margins decrease.

So, large profits are an indicator of low efficiency within a certain market. It’s therefore natural that prosperity should be the greatest when profits are the smallest. On the other hand, low profits may also be a sign of a lack of innovation in the specific market. If a company could innovate in a way that further reduced costs, then it would be able to increase its profit margins, at least temporarily until its competitors adopted the same innovation. Constantly low profit margins would therefore be a sign of economic stagnation – a lack of innovative ideas that could improve the efficiency of production.

On the surface this seems to be true, but we need to consider certain economic factors when dealing with production for own consumption purposes:

  1. What are the costs of producing good A (for example apples, meaning you have an apple tree) for your own consumption? You need to spend a certain amount of work in order to use the means of production M(A) of good A. In the simple example of an apple tree, in the simplest case, you need to move to the apple tree, and collect the apples. For more complex examples you would need additional factors like energy, raw materials, specialist knowledge, and so on.
  2. What are the opportunity costs of producing good A? Instead of producing good A, you could do something else which provides an income and hire workers to produce good A for you. Or you buy good A from some other source. If you had a job that paid 20€ per hour and you needed an hour to produce a certain quantity of good A, the opportunity cost of producing good A would be 20€.
  3. What is the market price of good A? If the market price is lower than the cost plus the opportunity cost of producing good A, it would make more sense simply to purchase good A from someone else, instead of producing it on your own. That’s because your personal total cost (production cost plus opportunity cost) of producing good A would be higher than buying it at market value.

So, even if you possess certain means of production it is far from clear whether you should actually use them. Instead, you might want to purchase that good from someone who has a comparative advantage for producing that good:

That’s why owning means of production is actually rarely a good idea, and trade is usually the economically preferable way of getting what you want.

Not really. You need to compare your personal total costs of producing good A with the market value of good A. If your total costs are higher than the market value, you are operating at an effective negative profit, even if your production costs are below the market value. Consider the following example:

Your costs for producing 10 kg of apples are 1 hour of work, for which you could get paid 20€. But the market price for 10 kg of apples may be 15€, so even if you had no production costs for your apples, except for your work time, you would be operating at an effective loss, since you could just as well decide to work for 1 hour to get 20€, which you could turn into 10 kg of apples plus the remaining 5€ from your work income. Using your own means of production would cause you an effective loss of 5€. It might still be worth it, if you preferred using your means of production to the kind of work that you actually get paid for, but that depends on your personal (hopefully economically enlightened) preference. Perhaps there are secondary benefits to consider. Physical work in the fresh air might provide additional health benefits that reduce your economic losses from disease, and so on.

As mentioned above, the effective profit may very well be negative. That’s because this way of economic activity doesn’t take into account the benefits of specialization and trade.

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This is what I was trying to address.

I am saying we can build “for product” businesses that are owned by the consumers.

When the consumers own the Means of Production and accept the Product itself as the return on investment, that business has no incentive to seek scarcity.

When the consumers own the MoP and accept the Product as ROI, there is no sale because the Product is already the property of the person who will consume it.

It is not necessary for those consumer to be the workers of that exact business, they only need to be the real owners and accept the Product itself as the return on investment.

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I guess what you are basically saying is that shareholders of a business can or should get the products of that business at production cost, which is usually significantly below the market price. That much is true. Yet, there are so many possible products that people may want that being a shareholder of so many different businesses could not be handled easily.

If markets are efficient, and profit margins are small, the benefits of this setup would be small anyway.

The core problem I wanted to address in this thread is that of artificial scarcity, mostly artificial scarcity of digital goods, which could be reproduced and distributed at virtually zero cost, but usually are sold at prices that are orders of magnitude higher. This is a problem that seems to be separate from the real scarcity of physical goods. Often, markets deal with the real scarcity of physical goods reasonably well (not always, granted). However, it seems that we haven’t been able to wrap our heads around how to deal with digital goods. Treating them like physical goods produces artificial scarcity.

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Avoiding paying profit is not the most important feature.

The most important feature would be that such a business would no longer seek artificial scarcity, and so we, as a society, could finally achieve our goals without being in conflict with the organizations that pretend to want to solve those problems.

To seek profit is to seek scarcity, for profit cannot exist without scarcity.

We have been conditioned to believe profit is a necessary goal of business, but a business structured as I have described does not seek scarcity because it does not seek profit because it’s goal is product instead.

Oh come on, it wouldn’t be that hard. https://en.wikipedia.org/wiki/Mutual_fund already diversify a single investor’s investments across sometimes hundreds of different corporations.

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Why not simply talk about non-profit organizations then? What advantages would your proposal have over “normal” non-profits?

Profit is not a necessary goal a business, but a business at least needs to cover its own costs, otherwise it can’t operate sustainably – without being subsidized.

So, you propose that any tiny investor gets the products of those for-product companies for its production cost? Ok, I am reminded that you mentioned something that amounts to investors and customers being basically the same, in the end.

Anyway, it all seems to come down to covering the costs of production, regardless of there being a profit motive or not. How can businesses cover their costs of production (without resorting to the creation of artificial scarcity)?

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If a non-profit is not owned by the consumers (and by owned, I mean real property ownership, not the powerless role of a shareholder), then the CEO types will overpay themselves, pretend those wages are a real cost, and therefore not report profits, but still be taking advantage of the consumers.

If the consumers are the real owners of such a business, they will just fire the CEO types, since they have no value anyway.

Profits are, by definition, income beyond the costs of production.

If consumers own an Apple orchard, and do none of the work themselves, they must pay all the costs, including all wages. If they accept the Apples as the ROI, there is no sale, and so the price they pay as consumers is exactly the costs they paid as owners and profit is undefined (also there is no sales-tax because the transaction did not occur).

FALSE.

The only reason businesses seek scarcity is because they seek profit.

If we remove the profit motive, we remove the scarcity motive.

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Ah, so your argument is that non-profits get quasi-profits by inflating the work costs of the CEOs to the level where “real profits” are zero? So, non-profits are something like for-profits in disguise, hmm.

It seems that in the case of non-profits the CEOs have strong incentives to inflate their pay, while in regular companies, the owners have a strong incentive to operate on a for-profit basis. In both cases, such companies could decide not to make any profits, but the incentive situation doesn’t make that a likely prospect. Why would the owners of a company decide to forgo possible profits and restrict themselves to only the products of their company as dividend?

Wait, are you assuming a scenario in which there isn’t even a market for apples, because everyone decides to become an owner of a for-apple company? So, no market -> no market value -> no possibility to even define profits?

First of all, you shouldn’t reply to answers with “FALSE”. I see such replies as really inappropriate.

Secondly, it is not true that the profit motive is necessary for having an incentive for creating artificial scarcity. Even if someone were to create a company with no intention whatsoever to create any profit, it would still be necessary to cover the costs of production. But if the company wants to produce a digital good, under natural circumstances, it will only be able to sell that good at most once, because after it has been released, it can be copied for virtually no cost. The problem is that the cost of that good, if it is only sold once, in order to cover production costs, would need to be so high that no individual buyer would be willing to purchase it, especially if the competition provides a similar good for “moderate” costs, or even for free. Those “moderate” costs however come from making such digital goods artificially scarce through copyrights, intellectual property rights, patents, and digital rights management, so that they can be treated like ordinary private goods following a regular market logic.

Ideally, the (potential) consumers should coordinate somehow to cover the production costs of digital goods, and afterwards be able to distribute them freely. Such coordination is difficult, however. The approach that seems to be currently most promising for that purpose is crowdfunding. With crowdfunding, the cost for getting that product in the end will only be a small fraction of the total production costs. The alternative then becomes:

  1. Pay a small price for a good chance to get the product in the end (be a crowdfunder for the product).
  2. Pay nothing for a slightly smaller chance to get the product for free anyway (be a free-rider for the product).

If too many people think that they can get away with being a free-rider, then the product won’t be created. What people are effectively paying for, if they crowdfund, is an increase of the chance of the product eventually being created, and possibly also the eventual quality of the product.

Well, crowdfunding is one possibility to avoid the problem of artificial scarcity. There are other ones, which I will examine later. Anyway, at the moment I wonder how to actually compute the economic losses from artificial scarcity exactly. It seems to be inviting to count every purchase for any digital good as economic loss, but that would probably be too much of a simplification. This approach doesn’t really take into account the economic utility of digital goods that exist, but are underutilized, because they cost more than nothing. I find it really hard to estimate the economic losses from not living in an efficient digital abundance economy. In any case, one could argue that those hypothetical losses are offset by the existence of digital goods in the first place, since without the methods of artificial scarcity there would be much less of a business case for creating them. Quantifying those effects might be helpful to figure out how important it is to fix the problem of artificial scarcity, at least if it turns out to be a net problem at all (which I strongly assume it is).

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Today I researched a bit in order to find out how much of a problem artificial scarcity actually might be. It seems that about around 1% of global GDP seem to come from digital goods. This becomes plausible, when we add up the sizes of the following industries (in $US):

  1. Software industry: 400 billion per year
  2. Book industry: 100 billion per year
  3. Movie industry: 88 billion per year
  4. Music industry: 15 billion per year

These industries are basically dealing with digital(izable) goods and they all to 600 billion per year alone. If we take similar industries that might also trade with digital goods, we might get close to a trillion dollar market world-wide. And that’s about 1% of global annual GDP.

Is 1 trillion per year a fair estimate for the economic inefficiency that comes from not selling digital goods at the marginal cost of 0? Possibly. Even if a reputation economy could make these economic domains 1% more effective, that kind of solution would be worth 10 billion $US per year! Even if I only had a 1% chance of making QP, or some other system a success, my contribution would have an expected value of 100 million $US per year to the global economy. And that’s enough reason for me to focus on reputation economy systems, especially since almost nobody else does that.

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Huh, it seems I need to dismantle my own argumentation here. There is certainly value in fighting artificial scarcity, but systems like Patreon might be just about as good for doing that than QP:

And Patreon actually exists now and is becoming hugely popular. So, what I am proposing is akin to arguing like

See? The success of Facebook means that there is lots of value in social networks. So, let’s build a better social network, even if the chance of replacing Facebook would be small, it would have a huge value.

The fact that Patreon exists and works is a good sign that a digital abundance economy might be on the way. It’s hard to say whether QP would be better than Patreon or not. QP is not the first system that has the chance to create an effective digital abundance economy. So, it might not be the best idea to use the creation of digital abundance as main selling point of QP.

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I think this should really be classified into two different categories. One is seeking artificial scarcity merely for greed. Merely to profit from it. The other is trying to enforce scarcity in order to prevent a major increase of scarcity later. The example of paying for food to be destroyed is of the latter category. The goal was obviously to limit how many farms go bankrupt due to the market disruption.

For the greed category, I’d tend to classify it as a parasitic behauviour and thus something that we should get rid of, if possible. However, the category where the aim is to preserve infrastructure is actually needed in today’s system and the interesting question is why is it needed.

I’ll attempt to answer this: Because we’re using money as a veil between producers and consumers, the consumers are unable to see the effects of their choices on the producers of the goods they want. There’s no way too coordinate an efficient response to the situation. With money, consumers are only focusing on what they need, right now and they tend to go for the cheapest option because they lack the ability to see what they’re actually voting for with that purchase.

If there was a more direct form of communication and commitment between producers and consumers, such situations would be much less dire. A sharp drop of demand would still hurt the farms, but it’d be quantifiable and immediately obvious. The farmers wouldn’t need to live in uncertainty about whether they’ll make it. They’d know in advance and be able to adjust in case it was clear they wouldn’t make it.

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It does seem to make sense to think in those two categories. But both of them are to cases of keeping businesses sustainable. A business without the ability to make profits will have a hard time surviving for very long. And businesses in oversaturated markets have bad chances for surviving, unless they have serious reserves.

While it’s really bad to have to resort to artificial scarcity to keep certain kinds of businesses alive, the conventional alternatives aren’t much better. A simple alternative would be to have government run companies (or companies subsidized for producing or not producing certain goods) provide the respective goods and services. Could that work? Perhaps, but this solution would probably not be very efficient.

I tend to get uneasy when I hear the word “greed”. It has too much of a negative connotation. And it’s too much of a simplification, like: “Look, these people are doing things wrong, because they are greedy. If they weren’t greedy, everything would be right.” While it may be true that some people are excessively greedy, a lot of people simply want to keep their standard of living. Does that motive count as “greedy”? And what about those who mostly want to create good products and need appropriate funding and revenue for that? Are they greedy? What’s the use of using the word “greedy”? What if we replaced the use of the word “greedy” with “ambitious”? Our perspective shifts a lot.

That reminds me of a German article about complexity theory: Systems in which agents optimize their local behaviour rationally work, but they usually don’t work optimally. They often run into systemic problems. But when they adhere to globally sensible rules, most of these problems can be addressed effectively. I think that maintaining certain rules for economic activity would go a long way. Sure, we have that right now with the laws that are made by governments, and they sometimes are quite beneficial. Unfortunately, that’s still an awkward solution that might be avoided if the individual agents actually understood what they were doing.

Perhaps it’s not so much communication and commitment what we need (though that would certainly help), but a way to visualize the consequences of the economic actions of each agent in the economy. Something like an (AI based) app that predicted a lot of the consequences of buying a specific product.

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Then you’ve invented a third category. I don’t categorize a business that’s struggling to survive into the greed category. I only put those companies there that are doing well and keep trying to squeeze more from people by manipulating prices upwards or worse, trying to maneuver customers into vendor lock-in situations and then jack up the prices. Although, you may have a point that the number of companies ending up there could well be pretty small.

The greed I’m talking about is a systemic issue. It can’t usually be localized into individuals directly. Another case of people being only able to perceive their local surroundings and collectively causing harm to the society at large by doing it. Some of them have no real choice, others do, but they lack the ability to see what they’re doing.

This is due to the corporate structures. Namely, the purpose of a corporation. I think I recall reading that it’s even written in the laws that a corporation’s sole purpose is to bring profit to the shareholders. However, it’s also cultural in that too many are striving for profit to the exclusion of other considerations.

Yes, hopefully we manage to device systems to facilitate this as well.

That’s communication right there in your description. You can’t get the data to visualize the consequences without communication in some form. Then, when there’s the visualization, the commitment is then however that affects the choices of each agent in the economy. Reputation is likely to play a key role here if we manage to influence the culture so people tend to respect more those people who make globally beneficial individual choices.

Well, that kind of happens already. It’s just that there’s a lot of confusion about what kinds of choices actually are globally beneficial. If we can somehow solve the confusion, things just might naturally flow the right way.

Haha, when I read this, I got the image in my mind of each product (or perhaps, we should focus on everything being an investment?) having an “overlay” on top of it describing the most important effects buying it would do for society. Kind of like things in games have modifiers like +1 strength, -1 intelligence. With AR tech, that might actually work to a degree.

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