Wednesday, November 28, 2012

A new economics

(Originally posted by Pat on 1/4/10)

Economics is in a bad way. No one predicted the current worldwide recession, and continual attempts to liberalize economies on the grounds that this will increase wealth and reduce inequality has served only to concentrate wealth and increase inequality. Our models aren't working, and we need to fix them.
In service of this goal I propose 7 new maxims that all economic models must take into account; they appear at first contrarian and counter-intuitive, but in fact they are clearly true; they only appear strange because we are used to presuming their opposites, typically for no good reason.

1. All cost is opportunity cost.
There is no such thing as the "value of a loaf of bread" in the absence of human beings who need  bread to live. The value of a loaf of bread consists entirely in its usefulness to human beings; giving up a loaf of bread denies me of value entirely due to the opportunities that I have sacrificed. If I have so much bread that it will all spoil before I can eat it, bread is worthless to me; if I have plenty of other food, bread is a mere convenience; but if bread is all the food I have, I will literally give anything I have to keep it. There is no distinction between cost and opportunity cost; they are coextensive.
2. All competition is monopolistic, and all monopolies are competitive.
There is no such thing as a perfectly free market. There are always differences between any two products--how far I must go to get them, what color they are, whether or not they are the brand I am used to buying.  There are always setup costs, always costs to move and change. Some markets are closer to perfect competition than others (software is closer than hairstyling, because I can buy my software from anywhere, but must get my hairstyling done near to where I live), but none are perfectly competitive or ever could be. Conversely, there is no such thing as a perfect monopoly. Even the monopoly on violence that the US military has over its territory is only a very good approximation; there are still fistfights and murders and the occasional militia. The more wealth a monopoly gains by being a monopoly, the more incentive there is for those outside the monopoly to topple or undermine it. All economic decisions must be made in a space between competition and monopoly, along a continuum of more and less competitive systems; there is no free market and there is no Communism.
3. Money can buy happiness---in fact, that's all it can buy.
The purpose of wealth is to achieve utility. Wealth that does not bring happiness to those who have it is failing at being wealth. It is stuff, surely; but there is stuff on the Sun and stuff under the oceans. Wealth is only wealth insofar as it gives people opportunities to create value.
4. A dollar is a concert ticket, not a loaf of bread.
In fact this is a subset of the first maxim, but it's worth reiterating specifically. Money is intrinsically worthless. In fact, it's worse than this; the value of money is arbitrary. (The value of bread is a function of our  biology; the value of money is a function of our social structure.) Money has only the value we give it, in exchange for things that actually do have worth. Money is the boarding pass for our economic community; it is the ticket we agree everyone must have in order to participate in that community.
As such, we do not have to respect the wealth of the rich or reject the wealth of the poor; the only reason Sheikh Abdullah has money is that we agree he does. We could rescind that agreement at any time, and there would be nothing he could do. Whether or not this would be a good idea, and whether or not it would be morally right, is a valid question. But "having money" is a social relation, not a physical one.
5. To own is to deserve.
The purpose of property is to regulate the exchange of goods and prevent theft and violence. That is why property exists. The point of the concept of "ownership" is to prevent people from simply taking whatever they want. When we say that someone owns something, we are saying that he has a rightful claim to it, that others may not take away that claim without justification.
As such, when someone steals, he does not own what he has stolen. It may be within his grasp, or it may be secured in some locked facility that he has access to; but he does not own it; it is not his property. It would be good and just to confiscate that stolen stuff and return it to those people who really do own it.
Yet this is precisely what we do not do in the case of tyrants. I mention Sheikh Abdullah precisely because he is a thief, and the son of a thief, and the son of a son of a son of a son of a son of a thief. He has no rightful claim to Saudi Arabia at all, only a de facto claim due to history and military superiority. Yet we treat him as if he really does have ownership; we buy his oil, rather than demanding it at the point of a gun. Thomas Pogge puts it well: If you take a warehouse by force, men with guns will come and arrest you and take the stuff from you. But if you take a country by force, men with money will come and buy the stuff from you.
6. Leisure is labor.
When people are not working, they are not simply taking up space. They are playing, or resting, or spending time with friends and family. They are making art, or thinking about philosophy. These behaviors have value, value every bit as real and important as the value of a car or a loaf of bread---indeed, much more so. The purpose of economics is to supply our basic needs so that we can have leisure, because leisure is so much more valuable than physical goods. All cost is opportunity cost, and the opportunity cost of less leisure is massive.
For the same reason, it is often the case that working harder---working more hours, or at a more stressful job---actually robs you of wealth, because the wealth you get from the extra money is outweighed by the wealth you lose in the denied leisure. By working harder, you are donating some fraction of your wealth to your employer. There is some amount of paid work that is optimal; it supplies all your basic needs while not taking away too much of your leisure. I hazard a guess that this amount is vastly less than the typical work schedule of Americans. It may be more like the typical schedule in Germany or France.
7. There is no such thing as a firm.
In this universe, there are no moral agents called "firms". "Microsoft" and "Monsanto" are fictions.  A moral agent can have needs, fulfill desires, make decisions; a "firm" can do none of these things. Any "firm" that we pretend exists is in fact composed of many human individuals that do exist, individuals who can work with some degree of cooperation and some degree of competition. A corporation can not have "worth" because it cannot have needs; to say that "Microsoft has $100 billion" is to say that an abstraction has a certain amount of abstractions. It is to say that something we made up has collected a lot of other things we made up---it's like saying that Harry Potter has a scar on his forehead, or that Discworld is supported by four (or five?) elephants. Governments, in fact, are the same way; there is no United States, only 300 million people who think of themselves (to varying degrees) as Americans, and some 500,000 of these who think of themselves as "government officials" and "civil servants". Barack Obama is real; the United States is a fiction.
Now, it may be useful to apply this kind of abstract modeling just so that we can make sense of what is actually an incredibly complex and baffling system. Much of the economics of "firms" is relatively sound once you realize that a "firm" is just a shorthand for "a bunch of people who collaborate in this particular way". But if everyone who presently works at Microsoft suddenly decided to do something else, there would be no Microsoft; there would only be empty buildings and meaningless ledger numbers. All of these things are social constructions; they exist only to serve real human needs, and insofar as they fail to do that, they should be changed.

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