Patchwork Design Lab

May 5, 2010

The Problem of Money and Value

Filed under: Human Ecology, System Dynamics & Culture, Systems Ecology — Tags: — Lonnie @ 7:06 am

Ruin is the destination toward which all men rush

Many economists, though by no means the majority, recognize two distinct ways of understanding wealth and value. There is intrinsic value, the value of things-in-themselves, of embodied energy, information, form. Then there is market or exchange value, in which price is determined by market demand. In the first case value increases with abundance; in the second value increases with scarcity. The more arable land and potable water you have, the more people you can feed; ergo, the greater the wealth or value. On the other hand, the more severely you can limit access to arable land and potable water, the greater will be the demand for it and the higher its price. There is another element in this equation. In order for higher price to translate into a wider profit margin, there must be a price spread created either by economies of scale or by preferential subsidies from the government. Either way, the key that opens the doorway to arbitrage is ample capital – enough to purchase land in large quantities or to subsidize the candidacies of key representatives.

A rational man, desiring to maximize the value of his holdings, is motivated to increase his market share, thereby creating relative market scarcity and raising the exchange value of his holdings. He can accomplish this either through acquisition or destruction. The marketplace, with its invisible hand, turns a blind eye to this distinction. Here is a case for keeping government and commerce separate with the same vigilance that we use to maintain the separation of church and state. Government’s job is to identify, develop, and protect the country’s critical resources, both natural and constructed. Enterprises generally wish to sequester and limit public access to resources so that they can buy low, sell high, and maximize their profits. Undue influence of either on the other impedes the proper functioning of both.

This war of competing values sets up a conflict between public and private interests that tends to play itself out in a scenario first described in 1833 by amateur mathematician, William Foster Lloyd (1794-1852) and reintroduced to a wider public under the name tragedy of freedom in a commons, or simply tragedy of the commons by Garrett Hardin in 1968. Here is the scenario in his words:

The tragedy of the commons develops in this way. Picture a pasture open to all. It is to be expected that each herdsman will try to keep as many cattle as possible on the commons. Such an arrangement may work reasonably satisfactorily for centuries because tribal wars, poaching, and disease keep the numbers of both man and beast well below the carrying capacity of the land. Finally, however, comes the day of reckoning, that is, the day when the long-desired goal of social stability becomes a reality. At this point, the inherent logic of the commons remorselessly generates tragedy.
As a rational being, each herdsman seeks to maximize his gain. Explicitly or implicitly, more or less consciously, he asks “What is the utility to me of adding one more animal to my herd?” This utility has one negative and one positive component.

  1. The positive component is a function of the increment of one animal. Since the herdsman receives all the proceeds from the sale of an additional animal, the positive utility is nearly +1.
  2. 2) The negative component is a function of the additional overgrazing created by one more animal. Since, however, the effects of overgrazing are shared by all the herdsmen, the negative utility for any particular decision-making herdsman is only a fraction of -1.

Adding together the component partial utilities, the rational herdsman concludes that the only sensible course for him to pursue is to add another animal to his herd. And another; and another… But this is the conclusion reached by each and every rational herdsman sharing a commons. Therein is the tragedy. Each man is locked into a system that compels him to increase his herd without limit – in a world that is limited. Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons. Freedom in a commons brings ruin to all.

An economic system based exclusively on exchange value is the perfect expression of and arena for this dynamic. As such, a system of this type will never produce abundance for all. The rising tide does not lift all boats. The system is designed to create difference, apartheid, extremes of wealth and poverty. Those who benefit the most are the ones in a position to set policy.

This, of course, runs utterly counter to the prevailing economic paradigm, which says that the combined efforts of rational decision-makers, each working purely in her individual self-interest, will redound to the benefit of all. I believe that the basis for this kind of thinking, which was born in the 17th century European Enlightenment, lay in an early and somewhat rudimentary insight into system dynamics. Adam Smith understood markets to be largely self-regulating – self regulating within certain limits. These limits had to do with resource constraints. This idea of constraints was quickly discarded as unimportant, relating only to externalities, by his successors. They were more impressed with his notion that the marketplace has an invisible hand.

Classical economics presents a very neat and elegant system. There is a perpetual-motion-like cycle where money flows to investment which mobilizes resources to produce goods and services which generate money which flows to investment, and so on. The flow of money and resources through this cycle is regulated by a mutual compensating loop dynamic, which Adam Smith characterized as an invisible hand. This dynamic operates to regulate price via demand and demand via price. As demand rises, the price tends to rise. Rising demand creates an apparent scarcity which enables suppliers to raise their prices. At some point prices climb high enough to dampen the demand, causing it to fall and so lowering the price as well. In theory, these oscillations gradually subside, and supply and demand are brought into balance at a relatively stable price. Stable prices allow people to make reasonable financial plans; stable prices create a stable economy, which benefits one and all by allowing the perpetual cycle of money and production to continue.

This all takes place through the actions of a multitude of economic players, each trying to maximize her individual benefit in a purely selfish way. And it works quite well as long as you discount a few empirical facts. Many economists, even some who are Nobel Laureates, claim that in economic terms, resource limitations do not impinge on this system in any significant way. Their argument is basically that human ingenuity is unlimited, and for every critical resource that is exhausted another will be found. The question in my mind is do they really believe that? If I were to go to a bank and ask for a loan using my unlimited ingenuity as collateral, how much do you think they’d lend me? Okay they say, ignoring the question, look at the history. In the very early days of the industrial revolution, when England had exhausted its wood fuel through deforestation because of overharvesting, they discovered coal. And again, when the supply of whale oil was threatened, again by overharvesting because of growing demand, what did we discover? Rock oil (of all things): Petroleum. Of course the costs of these discoveries – the soil-destroying, climate-changing loss of biodiversity through deforestation, the wholesale destruction of entire watersheds through efficient coal mining practices, more recently the ongoing destruction of coastal ecologies and (by the way) gulf coast fishing and tourism industries because of an explosion on a drilling platform that triggered a deep water oil hemorrhage – are not economically relevant.

But never mind that. Let’s just look at history. It’s easy to find historical corroboration for almost any position (this is where human ingenuity is most outstanding). As counter examples to the industrial revolution, what about Easter Island’s population crash or the collapse of the Classical Mayan civilization, both caused by the economically irrelevant drawdown of critical resources, trees and topsoil, mainly? What about the gradual desertification of the fertile crescent through the dual practices of upriver deforestation and long term over-irrigation and over-grazing?

What about physics? The claim that there are no relevant resource limits violates the first law of thermodynamics, which says that while matter and energy can be transformed one into the other, neither can be created or destroyed. The total amount of matter/energy in the universe is constant. The amount of matter on Earth is finite and very nearly constant, disregarding the loss of particles stripped off the upper atmosphere by solar winds. Therefore any material resource is finite, as is the total number of theoretically interchangeable material resources. Additionally, the perpetual cycle of money to investment to production/consumption to money, etc., violates the second law of thermodynamics. A closed-system perpetual motion cycle is not possible, because there will always be some loss of energy and information in every transaction. You may hide your income from the IRS, but the universe’s accounting system is flawless and never misses a single transaction.

Then, we could discuss how lousy a model of a human being is the rational utility maximizer of modern economic theory. We could talk about how perception affects exchange value and how plastic and easily molded through media bombardment perception has proven to be – also considered irrelevant in theory though quite clearly recognized in practice. But you get the picture.

The prevailing economic paradigm is tantamount to a state religion whose precepts are upheld and enforced regardless of any and all discorroborating empirical facts. These precepts, unsupported by rational examination, are upheld through faith alone, which makes the theory behind the global economy look either like a religion that extols greed and exploitation, or else, if that possibility is too discordant to your ear, simple pseudoscience.

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