https://www.mail-archive.com/[email protected]/msg03033.html
[Michael Perelman on whether the economy is productive or merely extractive...
and this is an important insight. Mark] ========== Introductory Walking along a
city street, I look up at a marvelous office building. Hundreds, perhaps
thousands of people are busy manning computers, telephone, fax machine, or
copiers or maybe just shuffling paper. Great wealth flows to some of the people
who occupy these offices or to those who command the people in the offices.
What exactly do they do? What exactly do they accomplish? In a field in the
countryside, a number of immigrant laborers are working hard amidst a toxic
soup of agricultural chemicals. Without these people or others like them, the
economy would grind to a halt. What would people eat without these workers in
the field? Yet, despite their undeniable contribution, these workers earn very
little unlike the privileged workers who occupy the more spacious offices.
Certainly nothing compared to those who give the orders to the crews in the
offices. In a market economy, everything follows the inexorable laws of the
market. Supposedly everyone earns a reward commensurate with his or her
productivity. Economists can tell you with assurance that the farm workers live
in poverty because their productivity lags far behind the average in the
economy. In contrast, the people in the more spacious offices enjoy enough
rewards to lead a life of comfort, or even luxury. Supposedly, they earn their
elevated station in life because of their high productivity, even though you
may have a hard time identifying exactly what they produce. Economists teach
that the people who in the offices who market and distribute the goods and
services must be very productive -- no, highly productive -- since their wages
are so high. These figure out ways to wrap products in layer after layer of
packaging. They devise advertising that makes people feel a necessity to buy
goods. People who get these jobs usually have some higher education, even
though their education probably has little to do with their responsibilities on
the job. This education is also supposed to be a signal of their productivity.
Even more productive are the people that shunt money around -- sometimes in
stocks, sometimes in bonds and sometimes in directly productive investments.
These people are extraordinarily productive. In contrast, to the successful
member of the economy, the lowly farm workers have little education. Their
skills are widely available since many people from poor countries would
willingly take their jobs. How could a person like that possibly be worth as
much as a successful worker occupying a lavish office? Besides, the food that
the farm workers grow is not worth very much, so how could they be productive.
Their meager productivity is thought to be sufficient to explain their low
salary. Of course, this conventional image could possibly have a different
interpretation. What if their low salary explained why the food they grow is
inexpensive? What if the high salaries that some professional workers earn
merely reflect the fact that they happen to represent sectors of society that
get special privileges? ========== extraction vs. production I want to raise a
basic conceptual problem about the nature of the economy: is the economy is
productive or is it merely extractive? By productive, I mean that the economy
manages to combine labor and resources to create something over and above what
initially went into the production process. Obviously, the production process
can turn out something move useful that the original products. For example, the
agricultural system can convert petroleum, which is inedible, into nutritious
food. On the other hand, the supply of petroleum is fixed. Eventually, the time
will come when an agricultural system, dependent on petroleum will have
difficulty finding an adequate supply of fuel. In contrast, the traditional
agricultural system had the potential to run on renewable resources, although
it often operated destructively as well. Now, if the economy is indeed
productive, then those who are the most privileged might have some legitimate
grounds for counseling the most disadvantaged that future economic growth will
be the most likely or most efficient strategy for bettering their condition.
For that reason, they would be well advised to accept their situation. If the
economy is purely extractive, then such advice has no grounds whatsoever.
========== Economic Logic Economics consists of two distinct layers of theory.
The first one comprises self-evident propositions that are virtually
unquestionable. Within this context, economics teaches that an individual
prefers more to less; that lower prices encourage consumption and discourage an
individual firm from increasing production. All of these propositions would
seem to represent common sense rather than some scientific wisdom. Notice that
each of these propositions refers to the behavior of an individual, acting in
isolation. Economics based on such common sense sometimes works relatively well
in simple situations. For example, you can feel fairly confident that if a
large number of people move into town without a corresponding increase in the
number of housing units, rents will increase. Problems emerge when economists
move from such simple analysis to deal with more complex situations that
involve interactions with other people. In that context, economists'
conclusions become more tenuous. For instance, high prices can actually
encourage people to purchase a commodity when low prices are taken as a signal
of an inferior quality. A number of software developers found that they were
only able to sell a large number of their products after they raised their
prices. Similarly, consumers sometimes prefer to purchase goods with higher
prices because of the snob effect -- that other people would see their display
of such goods as evidence of affluence. Although simple economic theory depicts
the actions of an isolated individual, a modern economy consists of a complex
network of interactions among a large number of people. Economists have no way
of capturing this complexity. Instead, they base their reasoning upon highly
simplified models that, more often than not, leave out essential elements of
the subject matter. Economists rarely signal any fundamental difference when
they make the leap from the common sense level of economics to this more
abstract level. Instead, they adopt an unmerited certitude befitting their
scientific pretensions. ========== Value Theory When pressed to explain the
basis of their theory, economists do not appeal to common sense, but to what
they call value theory. Value is a strange concept. It originally seems to have
referred to an economic equivalency, but the rhetoric of value easily slid from
economic value to religious values, family values, and back to economic value
again. Fortunately, the English language labels matters of real importance as
invaluable. Economists eschew anything but a relatively narrow conception of
value. For economists, value is supposed to convey something comparable to a
scientific framework. This "scientific" value theory has far ranging
ramifications. In fact, virtually all abstract economics rests upon an
underlying theory of value. More than a century and a half ago, John Stuart
Mill, probably the most important British economist of the time, explained the
vital importance of value theory for economics: "Almost every speculation
respecting the economical interests of a society thus constituted, implies some
theory of Value: the smallest error on that subject infects with corresponding
error all our other conclusions; and anything vague or misty in our conception
of it, creates confusion and uncertainty in everything else" (Mill 1848, p.
456). While Mill was correct about the importance of value theory, what came
next constituted perhaps the worst assessment ever made by an economist.
Brimming with confidence, he boldly proclaimed: Happily, there is nothing in
the laws of Value which remains for the present or any future writer to clear
up; the theory of the subject is complete: the only difficulty to be overcome
is that of so stating it as to solve by anticipation the chief perplexities
which occur in applying it: and to do this, some minuteness of exposition, and
considerable demands on the patience of the reader, are unavoidable. [Mill
1848, p. 456] Despite Mill's confident optimism, efforts to build a theory of
economics around value theory floundered, in large part because of the
difficulty of comparing values over time. The complications associated with
time are especially glaring in the case of capital goods since they are bought
at one point in order to earn profits in the future. More than a century after
Mill wrote, Christopher Bliss assessed the state of the theory of capital
valuation, a core element of value theory: When economists reach agreement on
the theory of capital they will shortly reach agreement on everything. Happily
for those who enjoy a diversity of views and beliefs, there is little danger of
this outcome. Indeed, there is at present not even an agreement as to what the
subject is about. [Bliss 1975, p. vii] He went on to explain: capital is many
things to different men. To the rentier it is a claim on income now and in the
future. To the entrepreneur it is some necessary inputs. To the accountant it
is entries in a valuation account. To the theorist it is a source of production
and a component of the explanation of the division of that production. [Bliss
1975, p. 7] Few economists took note of Bliss's pessimistic realism. Instead,
each school of economics continues to deploy its own idiosyncratic theory of
value without much concern for realism. ========== FIXValue Theory and Economic
Efficiency Economists conceptualize the economy as a network of relationships
in which each supplier is attempting to maximize profits. In so doing, the
combined effort of these suppliers turns a given allotment of resources into a
maximum output of value. This sort of economic theory might make sense if the
economy consisted of nothing more than a small village in which people awoke
each morning to take a fresh harvest of resources and convert them into a daily
output. In a real economy, in which people invest in long-lived capital goods,
such as railroads, and in which technology can sometimes change with maddening
speeds, confidence in the efficacy of the economic process is more difficult to
maintain. For example, part of the process of making bread consists in
conveying wheat in railroad cars. The decision of whether or not to bake
another loaf of bread to sell in the market is not very challenging, but a
comparable decision for investing in railroads involves enormous speculation.
What grounds does anyone have for believing that the investment in railroads is
the ideal one? Perhaps a revolutionary new mode of transportation will become
economical in a few years. Or the location of people or industry will move
eliminating much of the market of the railroad. Either possibility would wipe
out much of the value of the bread. ========== For example, in the late 1990s,
Motorola led a group of investors in the creation of a $5 billion communication
system. The venture filed for bankruptcy a few months after it was ready for
business. The Wall Street Journal enthused? Had the expectations of these
investors been met, the world might have hailed them as visionary. Instead,
they had egg ========== Value Theory and Discounting Economists still put great
stock in value theory even though they are usually discreet enough to stow it
away from public view. It was expected both to describe how the economy works
as well as to show why the market works with unparalleled efficiency. In this
spirit, Gerard Debreu, wrote in his book, Theory of Value, which won him a
Nobel Prize in economics: "The two central problems of the theory [of value]
are (1) the explanation of the prices of commodities ... and (2) the
explanation of the role of prices in an optimal state of an economy." (Debreu
1959, p. vii) In their quest for a scientific theory of value, modern
economists tried to model their discipline after physics. In fact, they
intentionally coined the term economics in the late 19th century to make their
subject matter sound more like physics. Earlier practitioners had referred to
their work as political economy -- a much less scientific sounding term. Given
their heroic effort to model economics on physical laws, you might expect
economics to resemble natural science. But, economics differs from natural
science in two significant respects. First of all, economics has nothing
comparable to the laws of the conservation of matter and energy. Instead,
productivity is the centerpiece of economics. Presumably, the productive system
allows the economy to take a given value of inputs and create a greater value
of output. Although economists allow that the proper functioning of the market
creates a surplus of value out of the blue, many, if not most, economists rule
out the possibility that the natural functioning of markets can destroy values
through the underutilization resources associated with depressions. Economists
sought the approval of the most important 19th century physicists regarding
their application of the physicists' mathematical techniques. Much to the
economists' chagrin, the physicists took umbrage with them on this very issue.
They insisted that economists could not legitimately pretend to have much in
common with natural science without some sort of conservation law (Mirowski
1989). The second difference between economics and the natural sciences is that
economists introduced the concept of discounting. Following common sense rather
than science, economists contend that a rational individual values a good today
more than the same good tomorrow. Consequently, the value of future benefits
should be discounted. Discount rates are unknown in the natural science. A
molecule of oxygen tomorrow is identical to a molecule of oxygen today. What
then should the discount rate be? Children place very little value on the
future, presumably because their brains are incompletely formed until maturity.
In effect then children have a very high discount rate, even though they may
have no idea about what discounting means. Business, too, has a very high
discount rate. Many corporations will abstain from any investment that does not
promise an expected rate of return of 20 or 25 percent. With such a high
discount rate, whatever happens 10 or 15 or 20 years from now is
inconsequential. Given that perspective, conservation of resources has
virtually no importance whatsoever. Obviously, discounting puts economists at a
considerable distance from environmentalists. ========== Sweeping Time Under
the Rug For the most part, economists are understandably uneasy in having to
confront the concept of time. Whenever they begin to feel confident that they
finally have a good command of their material, a deeper examination allows
disturbing questions of time to intrude causing obvious discomfort. Economists
apply great virtuosity to avoid coming to grips with the complexity that the
concept of time requires, but in doing so they make their analysis far less
realistic and even irrelevant to the real world. Nonetheless, one cannot
dismiss their work since it remains highly influential. Economists draw upon
standard practice in speculative markets to develop their main technique to
avoid confronting the difficulties presented by the concept of time. They
manage to collapse the entire future into a single number, known as a present
value or a capitalization. Consider the formation of a price for a piece of
real estate. This valuation process has three dimensions. First, the
participants in the real estate market have to estimate the range of
possibilities for each payoff period in the future. This number ultimately
depends upon some combination of the expectations about both the future sales
price and the rents that it will earn prior to the sale of this property to the
next buyer. Then the prospective purchasers have to apply a probability to each
of these possibilities to calculate an expected payoff for each future period.
Finally, they have to discount each of these expected payoffs. On the basis of
these calculations, speculators can come up with a figure that represents how
much a property is worth. If the market price is below that present value, it
represents a good investment. If not, a speculator will not make a purchase. Of
course, few, if any, speculators would actually make such precise calculations.
After all, the future remains unknown. Intuition and emotion probably exercise
more influence in most deals, but economic theory unrealistically assumes that
everybody behaves in a supremely rational manner. Such precision is essential
for the theory to be able to "prove" that the economy works efficiently. Even
if the speculators had perfect information about the future performance of this
property, the subjective influence of the discount rate would still intrude.
This present value calculation allows economists to treat long-lived capital
goods as if they were no different from a loaf of bread and would be both baked
and consumed within a few days -- in effect banishing the complexities of time
and uncertainty from their theory. ========== The Material Base of Value The
recent run-up in the NASDAQ dot.com stocks illustrates how tenuous the
capitalization process is. Investors, believing that Internet stocks had an
almost unlimited profit potential, investors bid up the prices of these stocks
to what in retrospect were ridiculous heights. These investors seemed to be
unmoved by the absence of profits. Given the high discount rate typical of
financial markets, these stock prices seemed to make no sense whatsoever.
Investors even seem to have taken the rate at which these companies lost money
as a signal of future prosperity. Many seemingly informed people, including
Alan Greenspan, the chairman of the Federal Reserve Board, fed this stock
market bubble. He proposed that the economy was entering a new phase in which
it could transcend traditional material limitations. Greenspan himself effused
about the potential of a weightless economy in which information would be the
driving force. Shortly after the NASDAQ bubble burst, California began to
experience severe shortages in electricity. One popular culprit was the
Internet -- the central figure in the fantasy of a weightless economy -- which
was accused of gulping as much as eight percent of the national electricity
load. While this estimate was highly inflated, it stood as a reminder that even
the weightless economy depended upon substantial material inputs. The
California energy system to large extent depends upon natural gas and
hydroelectric power, which, in turn, depends upon rainfall. A lack of rainfall
was a major factor in the California electricity crisis. The shortage of
electricity also forces the state to consider shortages of natural gas and
water. Because of the close nexus with water, the electricity system interacts
closely with both agriculture and aquatic ecologies. This complex network of
energy, agriculture, fisheries, and the rest of the environment stands in sharp
contrast to economic analysis, where the impact of an entire industry collapses
into a single price. In fact, virtually all economic models rule out such
interactions, except for price effects, in order to make the mathematics
tractable. ========== Imperialism and Extraction The cumulative demands that
the economy puts upon the economy are incalculable, especially because the
economy continues to grow. Even though this growth may not be particularly
rapid for the world as a whole, over time the magnitude of the economy takes on
huge proportions. John Robert McNeil provided some perspective for this
process. He observed: 500 years ago the world's annual GDP (converted into 1990
dollars) amounted to about $240 billion, slightly more than Poland's or
Pakistan's today, slightly smaller than Taiwan's or Turkey's .... By 1820, the
world's GDP had reached $695 billion (more than Canada's or Spain's, less than
Brazil's in 1990s terms). [McNeill 2000, p. 3] By the middle of the nineteenth
century, William Stanley Jevons, one of the most important figures in pushing
the subjective theory of value, confronted the challenge of trying to maintain
the a growing standard of living within the constraints of a sustainable world.
He wrote: The plains of North America and Russia are our corn fields; Chicago
and Odessa our granaries; Canada and the Baltic our timber forests; Australia
contains our sheep farms, and in Argentina and on the Western prairies of North
America are our herds of oxen; Peru sends her silver, and the gold of South
Africa and Australia flows to London; the Hindus and the Chinese grow our tea
for us, and our coffee, sugar and spice plantations are all in the Indies.
Spain and France are our vineyards and the Mediterranean our fruit garden; and
our cotton grounds, which for long have occupied the Southern United States are
being extended everywhere in the warm regions of the earth. While other
countries mostly subsist upon the annual and ceaseless income of the harvest,
we are drawing more and more upon a capital which yields no annual interest,
but once turned to light and heat and motive power, is gone for ever in space.
[Jevons 1906, pp. 306-7] While almost unanimously praised for his efforts to
further "scientific" value theory, this book subjected him to more than a
century of ridicule by mainstream economists. Nonetheless, the problems that he
raised were real. More practical people understood this resource dependence
within a political context. They recognized that the rest of the world was not
inclined voluntarily to cede advantageous access to the world's resources to
rich countries, such as Britain. In this spirit, Winston Churchill wrote in a
January 1914 Cabinet note: We are not a young people with an innocent record
and a scanty inheritance. We have engrossed to ourselves an altogether
disproportionate share of the wealth and traffic of the world. We have got all
we want in territory, and our claim to be left in the unmolested enjoyment of
vast and splendid possessions, mainly acquired by violence, largely maintained
by force, often seems less reasonable to others than to us. [cited in Ponting
1994, p. 132] ========== References Bliss, Christopher J. 1975. Capital Theory
and the Distribution of Income (Oxford: North-Holland Publishing). Debreu,
Gerard. 1959. Theory of Value: An Axiomatic Analysis of Economic Equilibrium
(NY: Wiley). Jevons, W. Stanley. 1865. The Coal Question: An Inquiry Concerning
the Progress of the Nation, and the Probable Exhaustion of Our Coal-Mines
(London: Macmillan). McNeill, John Robert. 2000. Something New Under the Sun:
An Environmental History of the Twentieth-Century World (NY: W. W. Norton).
Mill, John Stuart. 1848. Principles of Political Economy with Some of Their
Applications to Social Philosophy. Vols 2-3. Collected Works, J. M. Robson,
eds. (Toronto: University of Toronto Press, 1965). Mirowski, Philip. 1989. More
Light than Heat: Economics as Social Physics, Physics as Nature's Economics
(Cambridge: Cambridge University Press). Ponting, Clive. 1994. Churchill
(London: Sinclair-Stevenson). _______________________________________________
CrashList website: http://website.lineone.net/~resource_base
_______________________________________________
pen-l mailing list
[email protected]
https://lists.csuchico.edu/mailman/listinfo/pen-l
