Economic Activity

I usually use this blog to capture my evolving thoughts on consciousness, cues and human activity. I don’t have any expectation that people are reading it, but I make it public since that encourages me to tighten up the writing and thinking. For this post, I want to pivot a bit and discuss economic activity, which I’ve been thinking about more since reading Graber’s Debt and Piketty’s Capital in the 21st Century.

I’m always a bit confused as to what economic activity is, and even more so about what constitutes worthwhile economic activity — Is there a difference between getting a new, improved iPad vs filling and redigging a hole in the ground? The original hole-digging concept is attributed to Keynes who posited that if we filled bottles with money and buried them, laissez-faire economics would warrant spending money to retrieve it. In a similar vein Paul Krugman proposed a crash effort to defend ourselves against space aliens would have a similar effect.

I’ll ignore the space aliens scenario for a bit, partly because it’s too similar to the defense industry: a complete waste if you don’t have an actual enemy, but critically important if you do — & it’s often hard to tell the actual situation, e.g., substitute asteroids for space aliens.

What makes the hole-digging appear so pointless in contrast to other things that are arguably similar? It’s obviously not that the idea of digging, in itself, raises issues of economic utility. The hole being dug is usually part of a larger purpose, e.g., a swimming pool, or the foundation for a building. The idea of “filling it back up and redigging” is presumably a framing opposed to it’s serving any “greater good”

It precludes situations such as a research hole digging facility where the hole might be refilled, but since the activity of digging the hole is used to improve the machinery, it becomes part of a larger economic story. Once we can tie it in with a larger story, we’re presumably willing to ignore any questions about the implications of that story, e.g., what it the machines are only used to dig, fill and redig holes at another site? The goal of the research would then be to boost the productivity of “pointless efforts”. Transitivity would imply that this pointlessness would render the research activity pointless, but applying transitivity in economic situations like these is fraught in general (a what does it all mean/meaning of life question) and in capitalist societies we tend to avoid it.

The conventional redig scenario works as a thought piece because it posits a very closed system, money goes around it (presumably paying the person digging the hole), but nothing of value stays in the hole.

If we were to fill the hole and redig it to make a nicer, more stylish hole that might be more sensible, especially if we didn’t want to incur the cost of maintenance and effort of cleaning the hole, but were enthralled with the craftsmanship exhibited as the hole digger refined her craft over time— kind of like sports…. We could tighten the analogy by having a competition: the winner is the person who can dig the regulation hole and refill it in the shortest amount of time.

Having said that, I think (perhaps obviously) this is just another example of what I call the value grounding problem we act as if things (like gold) have some inherent fundamental value, but when examined, few things, if any have fundamental value. Even survival items, like food, or air have a value that is situational, at best. Famine would boost the price of the potato, well beyond that which one would see in early 21^st century United States. By the same token, if you and a sufficient number of your peers suddenly develop a fetish for watching artisanal hole diggers ply their craft, you might find yourself paying for their children’s ivy league educations.

In my mind this is one of countless examples that show the futility of trying to derive the absolute value of an activity: not only are the axes of value varied and incommensurable, but in the long run we’re dead and our heirs have squandered their inheritances at cheap bars.

This view is part of why I’m not particularly worried about robots taking people’s jobs: There can always be something new that needs doing: yoga instructor, software developer, nuclear weapons designer — most of which didn’t exist 100 years ago and could be replaced by occupations that don’t exist now.

On the other hand, the impact of unequal wealth distribution might be more of an issue — if only a few people have the bulk of the wealth, there’s going to be a limit not only to how much they need done, but also the variety of the things that they need doing. If surplus wealth (anything beyond survival, loosely defined as a common baseline — common baseline goods will generally have economies of scale and can lend themselves to being satisfied by automated solutions)— is widely distributed, the variety of not yet scalable tasks will likely suffice to keep everyone adequately employed.

What I’m guessing most of us would like is the ability to meet our fundamental needs (loosely defined), with enough extra so that we can satisfy our aspirational desires, plus adequate resources to resupply our capital stocks.

I’m drawn to this model by memories of Braudel’s Capitalism and Material Life, which describes western Europe’s gradual extrication from a material — hand to mouth; season to season; famine to famine; existence to one that utilizes capital to build an increasing surplus and lift out of a “natural” existence. Achieving the initial step required that all of the work of all workers became more than what was required to live at a sustenance level. As the productivity increased (measured here simply as % of overall labor required to grow the food and build the housing for the population) humanity became less bound to the weather. Feast/Famine diminished as factors governing our lives, and more people could attend to their aspirational goals. In the United States our food production is >> the minimum required and still only 2% of our population is engaged in agriculture (nor are we a food importer at any real scale)

Back 140 years ago, when 70-80% of all the jobs were in agriculture, I’d be surprised if people could have imagined that there would have been jobs available for that number of non-agricultural workers. My take away is that new classes of activity are always popping up, (artisanal ice cubes constitute my weird example of the week ) and if they can find enough people who’re willing to pay for them, they will thrive. If the match can’t occur because there’s no one who can pay for it, even if it’s well liked, thriving is not an option.

The best way to capture this is to look at the overall economy as being a system involving the set of flows of “stuff” through your economic unit (self, family, commune, corporation): can you add enough value to the inputs that you require, to obtain sufficient gross profit to satisfy your Fundamental, Aspirational, and Capital needs? If you can, things will be much more pleasant than if you can’t. Even if the social safety net is secure, and starving to death, or dying from exposure isn’t on the table, you now have the capacity to address your aspirational goals.

For flows to happen, resources have to get from C(consumers)→P(producers), in response to products (or services) going from P→C. The implication is that P can provide something that C wants (for simplicity, lets assume that the resources from C are something fungible, e.g., money— P will want it since it can readily be converted into whatever final form P desires). Achieving this requires that P can provide something that C wants and that there isn’t so much competition that P must provide it at a minimal margin over the cost of the inputs. This entails some form of pricing power: either from a supply/demand type of situation, limitation of the types of allowed transactions (slavery, indentured servitude), or allowing enforceable aggregations to form to change the supply/demand curve (monopolies/labor unions), etc.

For the following discussion it’s useful to consider the following terms:

• Production Capability: how many different products each person is capable of providing, working assumption: 10 or so
  • Model each person as getting their capabilities by random picks from thousands of urns. Some urns, like manual labor, have a high probability for acceptable levels, some, like movie director might be 1 in 1,000,000.
  • The end result is that each individual would end up with many of their skills being the ones that most people have, with a few more selective skills that they are good at, but may or may not have an adequate demand in their local economy.
• Consumption Desires: how many different products each person can consume of each type: let’s say 100, similar kind of urn picking, similar kinds of distribution
• Consumption Ability: resources, money, for simplicity.
  • Spreads out over the desires; keep filling the bin until you run out of money.

Now if, in the limit, there is a single C with all the money and 6 billion P’s it doesn’t seem reasonable to think that all 6 billion people could produce things that are desired by C. Even if that were the case, it would be perfect competition on the part of the 6 billion. Since there would be many more producers than needed, the pricing power would completely reside in the person with the money, and the obtainable price would drop down to being marginally above sustenance level. From a utilitarian “overall happiness of humanity” perspective, this might not be the worst case, since there’s little reason to assume that all of the 6 billion would have products of interest to the 1 person — after all, how many heart surgeons does he/she need? Therefore only a small number of people would have the resources to satisfy any aspirational desires

This shows that when the number of buyers able to purchase things of value falls below a threshold, the number of kinds of things that will have a market will be small. The result will be that many people will have no marketable thing that they are good/“substantially better than average” at. They will then have to shift to commodity items that won’t permit them to gather resources sufficient to fund their aspirational needs (the aesthetic enjoyment of hole digging, for example). This results in a downward spiral that ends with only the very few having their needs met. These few will likely have money left over (which they can hold in trust for their drunken heirs), since competition for their attention will be fierce, but will have all their needs satisfied. These few will have pricing power.

Limits are useful here: if there’s one person with the money/power, only a few hundred people might be employed beyond sustenance levels. If the proverbial 1% have the resources, it is conceivable that everyone might find employment. It is unlikely, however, since the distributions are random, it will not always be practical for a match to be made. There’s geographic and temporal issues when the numbers approach the limit: the P’s matching your needs may not be known to you, or if known, may be too “distant” for the transaction to occur. A more uniform distribution of $ resources mitigates this effect.

I was going to spend some time running actual scenarios here, but that doesn’t serve any real purpose. The system will have limits when only A people have substantial funds, and there will likely be few things that they want that cannot be funded with more than a minimal level of funding, so B people that receive funding in this way will have fewer funds to fund C follow ons, etc. It quickly peters out with an assumptions of savings, friction etc.. If A increases so that there is some pricing power in the (also larger) B class then the potential for a C class with meaningful aspirational resources exists, which, if conditions are right, can fund a D class etc..

As the class sizes get larger, the geographic dispersion will increase as will the set of skill that are valued, increasing everyone’s chances to fulfill their aspirational desires. It’s pretty easy to tweak network models to display effects like this, empirical data is more telling — I’ll leave that to the IMF