Wednesday, May 2, 2007

Value Subtracted

I read a story in The Economist many years ago, when its fact-to-ideology ratio was higher than now, and before glasnost came to Eastern Europe. It was about a flower growing enterprise in Poland.

The flowers were grown year round in greenhouses, and because of the cold and short days in winter, the greenhouses were both warmed and illuminated by means of a small, coal-burning power plant that the enterprise also owned, if “owned” is a word that can be applied to a socialist economy. Poland is a coal producing country, and in the Communist days, coal was sold internationally for hard currency, as were the flowers. The purchase of coal within Poland, however, was in the “soft currency” of the zloty, whose exchange rate was artificially high, set by fiat.

The analysis reported by The Economist may have been an academic study, or a product of the beginnings of political loosening that occurred in Poland in the early 80s. I don’t recall which it was; it might have been both. In any case, it was calculated that the coal that was used by the enterprise, if sold on the international market, would have brought more than the entire flower output of the firm. And that didn’t include the other inputs; labor, fertilizer, land, etc.

The flower growing enterprise, in other words, was a “value-subtracted” endeavor.

Now realize that this assessment would be impossible without the existence of external markets for both coal and flowers. In fact, the concepts of “value-added” and “value-subtracted” depend upon some market assessment of “value” in terms of some fungible intermediary, which is to say money, prices, and so forth.

This idea can be illustrated with another case I once heard. A couple bought a fairly large farm/ranch that included a portion of a forest. The two of them were classic urban-yuppie-back-to-the-earth-wannabes, the sort of folks that become anecdotal object lessons, in other words. They wanted to have a “sustainable lifestyle” and use only “renewable resources.” So they took pride in heating their home with the fireplace, using only wood grown on their own land—which turned out to be oak and maple that was worth a small fortune, well over ten times what it would have cost to heat the house by conventional means. They could probably have put up solar panels and heat pumps and still gotten away more cheaply. But any of these alternatives depends upon connections to the external economy. If that farm had been the whole world, what they were doing would have made sense.

There’s the concept in economics called “externality” which occurs whenever the market itself doesn’t capture all of the costs and benefits of a transaction or operation. Pollution, for example, is an externality. Our economy is still paying costs that date from mining operations dating back to the 19th Century, in the form of ground and surface water contamination. Extra health care costs caused by particulate air pollution is not reflected in the costs of burning the fuel that creates those particulates, and even those health care costs fail to capture the full costs of extra illness, morbidity, and death. In fact, most of those costs can’t be quantified at all, because human life isn’t fungible. There’s no market where someone can go and purchase an extra few years of life, though a few intrepid SF writers have tried to imagine worlds where that could be done. I don’t think I’ve ever seen one that wasn’t dystopian.

Likewise, as we draw down aquifers, fossil fuels, even the capacity of the air and water to absorb carbon dioxide without permanent changes, we have no way of assessing the “externalities” involved, other than to note that the externalities persist, while we personally do not.

I remember (but can’t locate) a quote from H. G. Wells to the effect that war is inherently inflationary, that every bullet fired, every bomb that is dropped, to say nothing of the buildings destroyed, lives lost, country-sides devastated, each of these things reduces the total wealth of humanity, without a corresponding reduction in money and the promises of monetary payment. He would have been speaking of what would be called “supply-side inflation,” were it not for the fact that economists seem to have hypnotized themselves by staring too long at Friedman’s quote, “Inflation is always and everywhere a monetary phenomenon.” And so it is, tautologically speaking, since inflation has to do with prices, and prices require money. And so it is with the idea of value-subtracted enterprise.

There was a time perhaps, when there was some value in war. C. Northcote Parkinson suggested that Darius the Great created an empire at least in part because that was the only way to expand trade, there being no international legal and monetary system at the time. Indeed, there was during Darius’ time, no “international” at all, which is to say that nation-states were the exception rather than the rule. Most of the world was lawless, save for tribal chiefs.

When travel and communication was rare, wars moved people in ways that they would never have moved on their own. Our own country has benefited from its participation in various wars, and not merely from imperial expansion (indeed, I would argue that inheriting former empires has been a negative for our nation). But “Howya you gonna keep ‘em down on the farm, after they’ve seen Paree?” has a real value to it—provided you want ‘em off of the farm. I’ve lived on a farm; I’m glad I’m not there. I’ll go further; I’m glad we are no longer a nation of farmers.

Part of what is decried as “globalization” is basically mass access to communications, travel, and transport. What globalization has done is to mimic some of the characteristics of war, the mass transport of populations and material, the great swings in the wealth of nations, even the enhanced contagion of disease (as exemplified in the ‘flu epidemic of 1918).

The first “globalization” occurred in the 19th Century, as new means of transport, communication, and, it must be admitted warfare itself, expanded and consolidated colonial empires. The empires were then torn apart in the wars of the 20th Century, leaving only two real quasi-imperiums by the middle of the century, the U.S. and the Soviet Union. I believe that the latter finally gave it up when the heirs to the Bolsheviks found their lives to be too boring when compared to the West, but I know that’s an idiosyncratic opinion.

Still, the lure of the exotic, the cosmopolitan, the hip and sophisticated looms larger in the collective id than is generally acknowledged. It is a powerful force, and it moves in all directions, uprooting the young and toppling the old.

By contrast, war itself has become more narrow, brutal, and costly as modern technology has tightened its grip. There are usually winners of even zero-sum games, but the losers of modern warfare have multiplied to a greater and greater extent, such that now, the only ones who believe that they can “win” are those who have already lost their minds. The only choices today are between greater and lesser loss.


TStockmann said...

If you're considering economic terms, consider "agency cost." Even if the populaces on both sides may lose, a leader or leader class may gain a good deal individually through war, imposing his/their will in the international arena internationally - and often gaining additional domestic. And there's always a roll of the dice for the history books. Finally, they are usually insulated from the consequences as well.

James Killus said...

Part of my point here is that over time, the returns to the leadership and elites has shrunk. Even the putative "winners" of modern conflicts have often suffered; Bush I did not win reelection; Bush II did, but at a cost to his party that is still growing, etc. And these were from wars where there was no existential threat.

The trend seems to be that, over time, warmongering becomes more and more abstract; chest thumping rather than actual mortal combat. For the war industries, ongoing bellicosity provides a more stable income stream than on again off again combat. Better to supply a steady weapons that are not used than pulses of weapons with contracts that end when the fighting stops.

My final point is that a lot more people think they gain from war than actually do so, just as the couple thought they were gaining by burning their hardwood.

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