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Say it ain’t so

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From Peter Radford re-visiting economics’ basic concepts I am nothing if not annoying.  Allow me to elaborate. Let’s be basic. I mean really really basic. Our model world initially consists of two people, Adam and Eve.  I know, it’s been done before.  But we are economists.  What are we interested in?  What problems that Adam and Eve face do we want to study? Well, they need energy.  Human bodies, like all ordered structures, need flows of energy to maintain that structure.  The Second Law of Thermodynamics is the damndest thing.  It gets in the way.  But that’s life.  So what do Adam and Eve do?  They go look for energy, which in our speak we call food.  They avert death by searching for, finding, and consuming food.  Problem solved. What do we make of this? Demand — the need for a

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from Peter Radford

re-visiting economics’ basic concepts

I am nothing if not annoying.  Allow me to elaborate.

Let’s be basic.

I mean really really basic.

Our model world initially consists of two people, Adam and Eve.  I know, it’s been done before.  But we are economists.  What are we interested in?  What problems that Adam and Eve face do we want to study?

Well, they need energy.  Human bodies, like all ordered structures, need flows of energy to maintain that structure.  The Second Law of Thermodynamics is the damndest thing.  It gets in the way.  But that’s life.  So what do Adam and Eve do?  They go look for energy, which in our speak we call food.  They avert death by searching for, finding, and consuming food.  Problem solved.

What do we make of this?

Demand — the need for a supply of energy — precedes its supply.  And that the search for, location of and ultimately the consumption of that energy requires more energy.  We are stuck in a loop.  We can summarize the search and location parts of the process as work.  And work requires its own source of energy.  

One thing leads to another as they say.  But cut to its absolute minimalist core, work is about sources of energy.  It is the application of energy to a task, which in a primitive sense is simply survival.  And the sum of all the work being done is the sum of all the energy gathered and processed to satisfy the demand for — energy.

I know.  This is absurd reduction.  But that’s where we need to go in order to clarify what an economy actually is.  It is the sum of work being done.  It is an energy flow.

In the fullness of time, of course, through serendipity and ingenuity, humans managed to supply themselves with a surplus.  That’s where life got complicated.  That led to conflict over who kept and/or consumed the surplus.  Sometimes it was some thug who managed to bully him or herself to the top and demanded tribute.  Other times it as a cultist who persuaded the gullible that they had contact with spirits and demanded tribute in order to translate the divine.  And yet other times it was simply a militarist thug who stole by dint of raw power.  

And that’s the way it was for millennia.  More than millennia.

Serendipity and ingenuity, though, are relentless.  The surplus grew.  More humans survived.  Not only did they survive, but they, through their imaginations, created a new category of requirement: they sought psychic satisfaction beyond mere survival.  This, too, requires energy.  It requires work.  Humans apparently like acquiring stuff, essential or not.  History does not lie — we do.  Even if it’s a trinket buried alongside an ancient inhabitant of some distant corner, it seems we have always liked to amass material things, it isn’t simply a capitalist plot.  And this requires work.  It requires energy.

One thing leads to another and we arrive on the cusp of the industrial revolution and the arrival of machines.

Machines, that is, on a grand scale, specifically designed as engines of work that consume energy and produce stuff at a scale hitherto unattainable.  Work and energy.  At scale.

It’s right about here that economists appear on the scene.  They are fascinated by the abundance of stuff and the vagaries of its appearance.  Sometimes there are over-supplies.  Sometimes there are under-supplies.  How come?  They get obsessed over irrelevancies like the value of all this stuff.  What is “value”?  No one cares except economists.  They study the ebb and flow of stuff and start to wonder how it all comes into being.  

And they frame their conversation within the boundaries of what matters to them.  Not in any fundamental sense, but simply in the context of their lived experience.  

They worry not about work, but about labor.  Labor being a slippery concept, they introduce at the inception of their discussion a vague notion.  They mix the skill humans bring to work with the effort — the energy potential — that they bring.  So at the very outset skill and energy co-mingle into one blurry notion.  

They concern themselves with the way in which machines can either augment or displace labor.  So machines, being seen as a substitute for the vague concept of labor, also become vague.  What is a machine?  How do we describe it?  Is it a tool?  Is it an artifice of prior labor?  Is it a consequence of surplus?  Is it a cause of surplus?  Is it property?  The sideline discussion of value that preoccupied them at the time led them into various dead-ends, giving machines a definition was one such dead end.  Ultimately the machine emerged as “capital” uneasily conflated with the cash needed to purchase or call it into being.  

So the apparent need to pin down the source of value, a philosophical sideline that neither Adam nor Eve would have found interesting, led economists to label the ingredients of the process of work as labor and capital.  Energy and skill disappear.  The design of machines is treated as uninteresting or unappealing.  The flow of energy is subsumed into discussions about the various combinations of labor and capital, neither of which has any specificity, but they do match the political conversation surrounding the social effects of industrial growth.  Vague concepts are tolerated because the underlying economic reality of flows of energy directed by design towards the completion of work is not the subject for discussion.  Political economy is a discussion of employment, class conflict, and ultimately the question of who creates and owns “value” and “surplus”.

One thing leads to another and economics then attempts to enter a more scientific age by becoming more mathematical.  It carries forward the same discussion. And, crucially, it carries forward the same vague categories as its key ingredients.

So, it cannot be a shock or surprise, that when, at long last economists decide to study the growth of economies and attempt to develop models to explain that growth, their efforts flounder.  The most well known models suddenly expose great gaps in knowledge.  Those gaps, the unexplained residuals of the models, lay bare the accumulated ignorance that economists now must grapple with.  Indeed the more honest amongst the modelers admit that the residuals are a measure of their ignorance.

An ignorance that stems directly from the error outlined above.

Discussions begin about other factors contributing to growth.  Information and design of machinery is introduced through then backdoor called technology.

In order to consume, work must be done.

Energy is consumed in doing work.

Energy is directed by design towards the accomplishment of work. 

Design is information.

The totality of consumption permitted by the accomplished work is the totality of an economy.

Ergo: energy and information are the proper objects of study if we want to understand the growth of an economy.  Not labor and capital both of which are muddled, unappealing, and uninteresting combinations of energy and information.  In economics-speak neither labor nor capital is homogenous.  Treating them as such leads to error.  To whit: “total factor productivity”.

I am hardly the first to say such.

“… different types of labor are paid differently depending upon the utility of the product they produce … “  

That’s Jean-Baptiste Say letting Adam Smith know that treating labor as homogenous will get you into trouble.  And, indeed it has led economics astray.

Anyone serious about re-booting economics must surely re-visit its basic concepts.  Re-hashing the 1800s just won’t do.

Ultimately, of course, this is all about what we consider to be important to measure.  Political economy concerns itself with the social and political ramifications of economic activity.  So it defines that activity in terms amenable to that conversation.  But growth theory is different.  Its terms ought to be those amenable to understanding growth.  They may be different.  Having a conversation about what those differences might be is hardly unnecessary or unappealing.

And say what you like about Say.  He was saying something sensible.  If only he had understood that demand precedes supply …

Peter Radford
Peter Radford is publisher of The Radford Free Press, worked as an analyst for banks over fifteen years and has degrees from the London School of Economics and Harvard Business School.

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