Monday, 15 August 2016

How to pour money down the drain

Ever commit yourself to something and then regret it? I’m starting to feel that way about this blog post. I realized something, you see, for whatever that’s worth, and I thought I might share it. But in order to explain it I first have to go over basic economic theory. Only, some people who are close to me in their politics have a very different economic theory, which doesn’t yield the same insight. So I have to start by explaining the two theories and why I think the first one has more explanatory power, and then I have to show that, although politics like ours traditionally uses the second theory, it doesn’t need it. I would rather just skip ahead and tell you my idea, but it doesn’t make sense if you haven’t sat through a few economics lectures. So here goes.

Where does profit come from? Capitalist economists explain with the trade theory. Suppose your old car is getting elderly and taking up space in your garage. You reckon that if someone nicked it you’d only be down $2500 all told. At the same time, I need a car for my work, doesn’t have to be flash or new, but I figure even an old banger will easily net me $4000 with the use I can make of it. So I offer you $3000, which is $1000 less than what I’m expecting to gain. You take it, because that’s $500 more than the car is now worth to you. This is what’s called a “positive-sum interaction”. You gain $500 in cash, and I gain $1000 worth of car. A total of $1500 has appeared out of nowhere. This $1500 is “surplus value”.

Economists apply this theory to all kinds of transactions, including labouring for a wage. The labourer is the seller and the employer is the buyer, and obviously the wage must be worth more to the worker than their time or they’d quit, while the labour done in that time must be worth more to the employer or they’d lay the worker off. Karl Marx disagreed. Goods don’t appear out of nowhere. Goods are made from raw materials when labourers put labour into them. Therefore, the labour is the source of the surplus value (measured as the price of the product minus the cost of the materials), and the labourer is the rightful owner of that value. According to the labour theory, an employer who then takes away the goods, sells them, pockets the profit, and doles out a fraction of it back to the worker, is nothing but a thief.

Which theory works? Another parable. Mr Miggs runs a back-shed factory making plastic coat-hooks that you can stick on a door. He sells them at $5 for a packet of three, but his cost to make those three, including labour, is only 50c. According to the labour theory, he’s robbing his staff of $4.50 per unit. But one day Mr Miggs buys a 3D printer, an automatic packet-sealing machine, and some drones to carry things around the factory. He sets up an automatic e-mail system to alert his courier when there’s a shipment ready. In short, Mr Miggs automates his process totally, and lays off all his employees. He can now make his coat-hooks at a cost of 10c per unit. He drops his price from $5 to $4.80, which raises his sales by 2%. Not only is he selling more units, but his profit per unit has gone up from $4.50 to $4.70. The trade theory easily accommodates this scenario; the labour theory boggles. Whose labour is Mr Miggs exploiting? Where is that $4.70 coming from?

Score one for the trade theory. But I would have to query whether Mr Miggs’ staff, back when he was employing staff, were genuinely free agents. When your only choice is between two bad alternatives (such as: break your back working for peanuts, or watch your children starve), then technically you could count as a gain the advantage that the lesser evil holds over the greater, but that seems awfully sophistical. If someone mugs you for your wallet, they get your money and you get to stay alive – it’s a win-win! The higher the stakes are for you, the smaller your bargaining power. The outcome might well be positive-sum, but if you can’t realistically negotiate your share of the benefits, they’ll be massively skewed in the other party’s favour. That sounds like exploitation to me.

Actually, “the higher the stakes” is not a good way of putting it. A speculator might lose millions in a day in a derivatives clearinghouse, whereas a drain-layer begging for a raise is only dropping a few hundred a week if their employer decides to fire them instead. That doesn’t mean the speculator is in direr straits. What constrains your bargaining power is how much you’ll be left with if things go sour. Back when I was taking my first semester of economics lectures, I wrote a post about what I saw as the major problems with economic theory as it is taught to university students. If I were writing it now I might moderate my tone in places, but I would not make any substantive changes. And the main point of that post is the proportionality issue I’m talking about here: some people can better afford to lose millions than others can afford to lose hundreds.

Now my realization is about the destruction of value, which the labour theory also doesn’t account for. If value can come out of thin air, it can also vanish into thin air. A simple example might be if you were competing with yourself. If that sounds like nonsense, think of professional sports. Their revenue comes from two sources: stadium seats and television ratings. These two are in direct competition with each other. The more people watch from the sofa, the emptier the stands are. Some portion, at least, of the advertising for either one shifts revenue around instead of increasing it. The money spent on that portion of advertising might as well be dumped into a shredder.

If any economics students are reading this, yes, this post is about what you have been taught to call “deadweight losses” – but not the ones your lecturers have told you about. First- and second-year students, at least, are taught to think in terms of what an ideal benevolent dictator would do to maximize something called “welfare”. But “welfare” turns out to mean merely the total amount of surplus value in society, without taking into account how much of an effect it has on human wellbeing. The dictator would be just as happy giving a thousand dollars to a billionaire who’d barely notice it as to a homeless person for whom it would be life-changing.

I think this is a screwy definition of “welfare”. Wouldn’t a truly benevolent dictator want to improve people’s lives, at least insofar as material wealth improves people’s lives? That being the case, wouldn’t they give each increment of surplus value a greater or lesser weight according to how big of an improvement it was over what the person already had? Giving the homeless person the thousand dollars would boost the weighted total far more than giving it to the billionaire. If that means the unweighted total ends up less than what it might be – as economics students are taught must happen with, say, a minimum wage or a rent cap – then so be it.

Yes, in this new calculation the people whose welfare matters most are those with the least bargaining power. Yes, that means that, contrary to what your lecturer told you, the free market will often not spontaneously reach the optimal outcome. For instance, they’ll have told you that the market punishes prejudiced employers, in that skilled employees will go work for fair employers, taking their productivity with them. But that assumes that the employees dare to gamble their livelihood on the next interviewer being sympathetic. (“Why did you leave your last position?”) I’ve never seen this assumption challenged in an economics lecture, but that doesn’t make it a good one.

It’s funny how economics lecturers always pick out equalizing policies like the minimum wage to explain the concept of deadweight losses, never unequalizing ones like the ones I’m going to talk about in the rest of this post. Could it be that their teaching is a tiny bit politically motivated? Heaven forfend! Say it ain’t so!

One way to pour money down the drain is to withhold goods or services from the market in order to keep the price up. Ever wondered why supermarkets are so down on dumpster-divers – why they’re so possessive of stuff they’ve discarded? It’s because they get cash back for food unsold at its sell-by date. They make money on it whether they sell it or not. Presumably they make more money by selling it or they wouldn’t bother; thing is, though, food in people’s cupboards satisfies demand and thus brings down the price, which food in dumpsters doesn’t. At some point it becomes more profitable to dump the excess and get the cash back than to sell it. So every week a mountain of food is destroyed, and its value with it. Would it be enough to solve world hunger, if it wasn’t wasted? I don’t know, but it would surely help.

This practice has been given the name “forced artificial scarcity”. Something similar is done with diamonds, although there the goods are locked up in drawers instead of destroyed. Unlike the food, that doesn’t affect a great number of consumers. But you know what does, now, affect nearly everyone on the planet? The internet. What are the consequences of forcing printing-age intellectual property laws upon an electronic world?

The whole justification for having markets and money at all is that goods are scarce, i.e. there isn’t enough to satisfy everybody’s last little whim. So you have to make some arrangement for distributing them. A market is at least more likely than, say, a lottery or a waiting-list to put goods in the hands of the people who need them most (since those people will be willing to pay more). The problem with that, of course, is that markets don’t distinguish between willingness to pay, which correlates positively with need, and ability to pay, which if anything would correlate negatively with need. However, on the internet, this point is moot. Information is not scarce. There is plenty to satisfy everybody’s whim. Or there would be, if the gatekeepers didn’t keep putting up paywalls.

You know what else is fundamental to capitalist civilization, besides markets and money? Credit. Banks pay people interest on their savings. People invest money in business ventures expecting to get out more than they put in. No-one would do that unless there was going to be a bit more money around tomorrow than today. That only makes sense if tomorrow’s goods and services are more worth having than today’s. This requires unceasing technological advancement. But the Western cultural myth of the genius inventor, the Tony Stark making the first Iron Man suit from scrap metal in a cave, is exactly that – a myth. Real invention is done by incremental improvement, and it absolutely depends on free access to other people’s ideas. Intellectual property laws stifle it.

Of course, intellectual property – basically, copyrights and patents – was conceived for a reasonable purpose. Content creation is work, it takes time and energy, and if it’s not remunerated people will prioritize other things. Artists and musicians rightly feel insulted when businesses ask them to produce work for free for the “exposure”. But what purpose is served by withholding work from the public domain for fifty years after the creator’s death? Or seventy years, if the TPPA goes ahead? And how much of the purchase price ends up going to the creators, anyway, rather than the publisher or record company?

Things could have gone a lot better if the financing structure of the internet had got off on the right foot to begin with. It should have worked like book publishing, where the reader pays the bookstore, the bookstore pays the publisher, and the publisher pays the author. On that model, we’d have had users paying their internet service provider, the ISP paying the hosting companies, and the hosting companies paying content creators. Then there would be no need for paywalls, and we could download and share movies and music and articles without having to worry about the artists going hungry. Instead, we have a situation where content creators pay hosts, and both hosts and users pay ISPs. And so it’s called “piracy” when people use the internet as it was designed to be used.

That was a small mistake when the internet was new, but it’s hard to see how we can correct it now. What would the half-way phase look like? I could imagine ISPs offering free access to certain paysites for a little bit extra on your monthly internet bill, but that would mean violating net neutrality and that’s a really bad idea. Net neutrality means ISPs aren’t allowed to block or slow down your web traffic or redirect it to sites they get money from. Your ISP already has a chokehold over the content you can get through the internet. Net neutrality is the only thing stopping it from squeezing.

Suppose that someone offered to do something for you for free. Let’s say they’ll drive you to work, whenever you want to go, and they’ll cheerfully take on fuel costs and car maintenance and everything all themselves. Now how badly would your judgement have to be impaired before you not only turned them down, but took a sledgehammer to their car? Pretty badly, right? I’ve got a fairly good imagination, but I can’t imagine being that stupid. Except that modern industry does this kind of thing all the time.

How much would it cost if orchardists had to hire people to come in every spring with ladders and little paintbrushes to pollinate their trees, blossom by blossom? I haven’t actually done the maths, but I’m pretty sure you’d have to whack the price up so high and the wage down so low that nobody would be able to afford fruit any more. You know why they don’t in fact have to do that? It’s not magic; it’s bees. Very few of the fruits we eat would exist without bees. Crops whose fruit we don’t eat we mostly grow from seed, which also usually relies on bees. If bees die out, they’re taking us with them. And right now, it’s not looking good. The rumour that it’s genetically modified corn that’s killing bees in North America is at best unproven; but the only other suspect is pesticides, in which the food industry is equally complicit.

Or take soil erosion. Food comes from farms. Farms don’t work without soil. Soil doesn’t stick around without trees. When it gets wet, trees soak up water and stop the soil going runny. When it gets dry, trees block the wind and stop the soil blowing away. Forests also help purify water and air in ways that are harder to summarize in a simple sentence. Civilization needs forests. There’s a minutely detailed book by Jared Diamond about what happens to civilizations that get rid of their forests; it’s titled Collapse. But humans are removing forests from the Earth at a rate equivalent to a football field a day, and there’s no sign of it slowing down.

Four years ago, in my first semester as a note-taker, I took several ecology-themed classes for one student – soil geology, hydrology, New Zealand wildlife – and a first-year economics paper for another. It was like watching a train crash in slow motion. The ECON lecturers repeatedly explained comparative advantage with New Zealand’s then-booming dairy industry: “We must keep intensifying to get the greatest possible value out of trade.” The ecology lecturers meanwhile kept talking about the damage dairy was doing: “Intensification builds up toxic substances in the soil, which get into the milk, and sooner rather than later a health inspector overseas is going to notice.” Which is precisely what happened. Now the ECON lecturers are using dairy to illustrate the unpredictability of the market.

A couple of years ago, before oil prices crashed, there were oil companies interested in drilling in New Zealand offshore waters. One weekend in February there was a protest against them, and some local dropkick responded by flying a small plane around trailing a banner reading ProGas 4 Drilling. The idea on the pro-drilling side was that drilling would “create jobs”. This was, of course, mistaken. Oil wealth doesn’t generate jobs; it goes into the pockets of a very, very small elite, and stays there. Think of Saudi Arabia, Nigeria, or Venezuela. Only countries that had a seriously redistributive economic system before they discovered oil, like Norway, have managed to turn it into jobs.

It’s not that I can’t see the appeal. Most mornings, I walk through South Dunedin, one of the poorest places in New Zealand, to catch the bus to work. The major employer in this area, a train factory called Hillside Works, was downsized when the National Government decided it would be cheaper to import rail stock from China. So you can see how the prospect of a job in the oil industry would be tempting to someone who’s stuck there. Until you take climate change into account.

Last June South Dunedin flooded in the heavy rain. Being poor, it hasn’t bounced back very well. Some houses still have piles of debris in their front yards. Actually, there’s been a major flood somewhere in New Zealand every year for over a decade now. When it’s asked why there weren’t adequate protections in place the excuse, year after year, has been “This was a hundred-year flood, not something predictable enough to warrant planning for.” That is climate change, and if you’re trading off the real costs of fossil fuel extraction against the benefits, it has to be included on the cost side. It’s not a net gain getting a minimum-wage job if, at the same time, your house is gone.

Now with only 0.06% of the world’s population and maybe 0.25% of its productivity, it’s fair to say that New Zealand can’t have much of an impact on climate change in our own right. But precisely because we’re small, we’re agile. We could lead the world by example – by being a small-scale demonstration of how a clean-energy world could work. If the present government hadn’t pulled the plug out of the Otago Design Institute (which you haven’t heard of thanks to said plug-pulling) which could have designed the new technology. If it hadn’t encouraged the closure of Hillside Works and other manufacturing plants which could have built it. If it hadn’t banked New Zealand’s future on the dairy bubble never bursting.

If, in short, it wasn’t in the habit of pouring money down the drain.


  1. It's not pouring money down the drain. It is letting money be sucked upwards towards the top. Reverse osmosis

    1. No it isn't. That's kind of the whole point of the post. Big corporations that trash the environment or sue people for downloading stuff do profit by it, in that they get a bigger share of the world's wealth, in revenue or in avoided costs, than they would if they didn't. But that profit is nowhere near equal to the value destroyed by their actions.