Sunday, June 01, 2008

Price, value and cost

In my series on economics I'm trying to really nail down the counterintuitive point that in a free market, prices tend downwards towards the cost, not upwards to the value. Even in oddball edge cases, like novelists or NBA players, physical bottlenecks just cause the cost (often externalized) to rise towards the price: So the price of any commodity always tends to be a function of its cost, not its value.

The incredible differences in wealth we see in any elitist society, whether it be the Capitalist societies of the West or the (revisionist) Communist societies of the East, are not because the elites produce more value. Even if they did produce tremendous value, that still would not entail that they receive a price commensurate with the value.

A related myth is that differences in individual skill or character are the cause of vast differences in wealth. This myth is even held by some Communists, who see the eradication of any difference in material wealth due to skill as the key point for creating a classless society. In a free market, differences in price due to differences in skill is not the difference between the most skilled and the least skilled, but rather the difference between the most skilled and the second or third most skilled (i.e. the most skilled who do not produce the commodity, i.e. the opportunity-adjusted cost). In other words, the economic consequences of inherent skill differentials are relatively small. Furthermore, as society becomes more specialized, people will tend to gravitate to the fields for which they have the most skill; most people will be performing the occupations for which they are relatively the most skilled.

In a truly free market, excess value always accrues to the common good, not the purely individual good. A truly free market tends towards communism.

The vast differences in wealth are always due to pure social constructions that at best amplify differences in skill by many orders of magnitude or at worst create vast differences based on non-economically-related qualities (usually birth* and/or religious/ideological conformity).

*Is skill inherited? Compare and contrast Conrad and Paris Hilton. I rest my case.

We ourselves, as sapient beings, create pure social constructions; they are not imposed upon us by objective reality. In ecology — economics with only the most basic, limited social constructions — we see no vast differences in wealth at all. An apex predator, relatively speaking, lives just as close to the edge of starvation as the animals and plants at the bottom of the food chain.

The biological facts of human psychology form the only objective constraints on our pure social constructions, but we already know that human biological psychology is extremely labile. We can and do learn to think mostly not as our brains compel us to think but as we're taught to think.

We are not constrained in our economic arrangements by our brains. We are not constrained by our history. We are constrained only by our own illusions, our own gullibility, and our own fear.

6 comments:

  1. We are not constrained in our economic arrangements by our brains. We are not constrained by our history. We are constrained only by our own illusions, our own gullibility, and our own fear.

    This is a fascinating and provocative point! However, I think you setting up a false dichotomy here.

    I am convinced that our illusions, gullibility, and fear are, themselves, highly determined by the evolutionary history of our brains and the cultural history of our social arrangements.

    This is not to say that, therefore, current economic structures are inevitable and immutable. But I do think they are constrained within a certain range of possibilities by our biological and cultural history. And this is also not to say that I think we have come close to exploring that range.

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  2. I am convinced that our illusions, gullibility, and fear are, themselves, highly determined by the evolutionary history of our brains...

    I have to disagree. The empirical evidence contradicts this view:, that people have changed their social circumstances many orders of magnitude more rapidly than biological evolution can account for.

    ... and the cultural history of our social arrangements.

    Again, I have to disagree. There have been any number of radical changes to our social arrangements: The Enlightenment, American democracy, European democracy, Soviet and Chinese Communism spring immediately to mind.

    I'm not saying that our biological and social evolution is not important; I'm saying it's not determinant to anything like the same degree that biological evolutionary history is determinant in organisms' physical forms.

    More importantly, our cultural evolution — and even biological evolution, via artificial selection &mdash is profoundly influenced by our ability to think, plan, and imagine. This influence is completely absent in ordinary pre-human biological evolution.

    We are no longer at the complete mercy of raw physical law and purely random chance. We now can be what and whom we want to be.

    And this is also not to say that I think we have come close to exploring that range.

    Agreed.

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  3. There's another aspect to wealth, though, beyond just how much salary you can earn or how much money you can make selling your widgets - that is how much money you invest in making more money and how much you squander.

    Two people with identical incomes can end up in vastly different places - if person one invests all of his excess money (and so gets a rate of return on it) and person b spends all of his excess money on alcohol, which he then drinks, (or popcorn or what have you) - at the end of 30 years, person a could be wealthy and person b could be still living paycheck to paycheck, with no savings and no ability to retire.

    Individual choices do matter. Though what you often point out is that there are many things beyond a person's control that could prevent savings - be it a salary that is too low to medical expenses or anything else - so there could be a person c who also has nothing saved after 30 years of working through no fault of his own. Republicans tend to assume everyone not rich is in category b instead of allowing for the vast numbers of people in category c.

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  4. Interesting that you equate true free markets towards true communism. For some time I've tried to develop an argument that the Soviet Union was actually capitalism's ideal: an overarching vertically and horizontally integrated corporation that controlled every aspect of the economy. You sort of see that in today's conglomerates, with companies like General Electric. I just couldn't ever get the argument to cohere, as I'm a terrible economist.

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  5. You are claiming that we should aspire to animal kingdom of other species. You do this in first erroneously equating ecology with economy and then claim that biological facts of man are the only limits to social constructs. Are you claiming an idealized state of nature? Oh, and of course there is no differences of wealth in the animal kingdom, they do not have wealth at all, it's an alien concept. Comparing humans with other animals is apples and oranges. You go on to use the phrase "social construct" as if it were a bad thing.

    Of course property rights are a social construct. The value of property and labor is also a social construct. Egalitarianism (or progressive as you like to call it) is another social construct. Where is your argument that your social construct produces better results than a free market construct, and on what criteria?

    If we start with the concept that a person can and should own things and that respect of ownership is codified into law then we have the basis for free-market. I have a skill that only a certain percentage of the population posses. I know someone who can make a product, but needs my skill. I freely enter into a contract and am paid a wage based on what my employer and the market believes my skill is worth. Nowhere in this exchange are rights violated, immorality done, or others denied opportunity.

    If you want to make an argument against the extra-legal status of corporations,that you hint at and one commenter alludes to, then go ahead but don't be surprised to find free-market moderates and libertarians doing the same.

    Your free markets equal communism aside is a complete non-sequitor. Just before that you are discussing skills in the labor market and then go on to assert without evidence something I'll get to next. Nowhere there did you preface or defend your assertion that free markets equal communism.

    The biggest problem here is that you say the vast differences in wealth are always due to social constructs. Wealth and money are social constructs, it's like saying that all burns are caused by heat. You have failed to show how a free-market creates any inequality that wasn't there before the free-market came into existence?

    We are constrained only by our own illusions, our own gullibility, and our own fear. That's lovely rhetoric, when are you running for office? Now if only that meant something or tied into any argument you made above.

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  6. Jimmy Dean: You are claiming that we should aspire to animal kingdom of other species.

    I claim no such thing.

    You go on to use the phrase "social construct" as if it were a bad thing.

    I do no such thing.

    If you want to make an argument against the extra-legal status of corporations...

    I'm sorry, I don't see where I discuss either legality or the concept of corporations in my post.

    Your free markets equal communism aside is a complete non-sequitor.

    Did you read my other posts? If the price of commodities in a truly free market tends to the cost, then we have an economic system that distributes value to the consumers, not the producers. This is a very communistic concept.

    You have failed to show how a free-market creates any inequality that wasn't there before the free-market came into existence?

    You have completely failed to grasp the point of my series on economics: Free markets do not resemble our present capitalist society. A truly free market more closely resembles a ideal communist society. Therefore it is capitalism that results from the limitations of freedom in markets.

    That's lovely rhetoric, when are you running for office?

    I'm prone to the occasional rhetoric. So sue me.

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