Good economics recognizes that we do not produce merely for the sake of production, hobbies notwithstanding. In other words, the sole end of all production is consumption. The reason I am in here long before the break of dawn is not really because I particularly love combing through the NBER Working Papers, or that I am particularly thrilled to dive into the nuances of price sensitivity for my morning lecture, but rather because I want to make my mortgage payments. In other words, since I am not able make everything that I want for myself, I have to engage in trade with strangers in order to have them provide that stuff for me. And since we are not living in altruistic fantasy-land, most folks around the planet don’t wake up before the crack of dawn thinking of what I might want or need on that particular day — I have to persuade those folks to provide things for me by in fact delivering something to them first.
The nice part of our modern economic lives is that when I engage in this process, I still don’t have to figure out what any one particular person wants – for example, the guy who sold me my hockey stick may in fact want a bagel in exchange for it. All I have to figure out is what someone, somewhere, may want – and be willing to exchange something, somewhere for it. The extended web of human cooperation is woven tightly enough together that all I really need to do is make sure I am in the web, and be less concerned about where I am in it. There have been dozens of books written exploring this topic, and in a little more elegant style than the paragraphs above.
Today however I’d like to point out another way that consumers are producers, and one that I find to be a deeper and perhaps just as important insight. The entire process of our economic lives consists of a sort of human alchemy – transforming things that we find less valuable into those that we find more valuable. As “traditional” producers this process is ingrained in our heads as pretty straightforward. As a brewer, you get some water (sometimes treat it), you get some barley and perhaps some specialty grain, you culture some yeast, you grow some hops, and you do a little magic by transforming them into a delicious nectar called beer.
But, it’s not just as producers of goods in the product market that we act in this transformative manner. When we, as individuals, set out to consume something we are engaging in exactly the same process. Imagine you have a headache. For someone who has a headache and who wishes to be rid of it, you can argue that they are in search of “purchasing a good” by the name of “less pain in my head.” I use this example rather than a more mundane one like, “wants an orange” because I think the following point is clearer here. When I want to “eat an orange” I’m not actually seeking out the good of an orange. What I am doing is looking for a way to quench both thirst and hunger and perhaps obtain important vitamins. That an orange happens to be the good that most readily satisfies those desires obscures the fact that an orange is in fact MERELY one way to be able to do that.
The point is that an orange is not an orange. When I purchase or grow an orange for myself, I am not growing “fleshy fruit with thick skin and vitamin c inside” but rather I am growing an input into the production of something else I want, and when I consume an orange I am not really eating fleshy orange fruit. No! What I am doing is consuming the services that are provided by this physical object. Put in this way, you can see that there is not in fact any “correct’ way to consume an orange. Should one wish to play baseball with their son, an orange is definitely on the list of things that may enable us to play such a sport. Should one wish to make craft projects at home, an orange is clearly on the list of things that may enable us to do that. Should one be hungry, an orange is clearly on the list of things we can use to meet that need to. And an orange, disagree as you may, is nothing more than an idea, a possibility, an “input” into the production of some service that you wish to obtain. That you are most familiar with it being used as a way to get calories and vitamins does not mean that this is the “correct” way to consume an orange, or that this is the “purpose” of an orange.
The beauty of our human minds and our individuality is that each of uses our own minds and our own vision to determine what we would like to do with particular “resources.” This is not information that can ever be knowable by some third party, particularly of the political kind where there are neither incentives nor mechanisms to transmit that knowledge from person to person, and certainly not the incentives to get it right. Indeed, many of us don’t know this knowledge until perhaps placed in a particular position to generate it. And this is the miracle of the price system. What enables us to draw deep in our minds to seek out different and “better” ways of doing things? Is it the pleading of our moms? Is it the bleating of our bloviating buffoons in the capitol? Hardly. It is the “system” of prices that we are enmeshed in.
Think about your pained head (and I’m probably making it worse right now). How do you decide how to best deal with that head? Like it or not, prices guide our behavior here. You may be thinking about how much an Advil costs, and if it’s price is low you surely secure some immediately and pop them down with a glass of coffee and water. But at $100 per Advil, you might simply tell yourself, “It’s not worth it, I’ll figure something out.” We do this all the team. When “prices” are higher (i.e. when we have to make greater sacrifices of OTHER things to get more of THIS thing), then these tradeoffs force us to mitigate our desires, if only a little bit. And as the tradeoffs become more severe, we look ever harder for other ways to secure the services we want. There is nothing in our nature and nothing in economics that says all desires CAN be met. But what is terrific about a system of property rights and prices is that each of us is free to look at a price, a tradeoff, and ask ourselves, “are we able or willing to endure this tradeoff” in order to get the service we want. You may want to pay $100 per pill. I may not. And this may not have anything at all to do with our income. No third party is able to make these choices as well as we can. Furthermore, think about how your behavior changes as these prices increase. As Advil prices go from a penny per pill to a quarter per pill to a dollar per pill and more. You may begin looking for other ways to meet the headache straight on. Maybe you use aspirin. Maybe you take ice cubes out of the freezer and place them on your head. Maybe you pray. But how you decide is up to YOU. There is no right way to economize. But the price system forces you to do it, and it forces you to do it in a way that suits you, and does so without the use of real force. It’s ethical.
And in thinking about your headache, what you realize as the price of Advil moves around is that Advil is not the “correct” way to solve that problem. Your mileage may vary, but you should at least recognize that Advil is not Advil. What “Advil” is is at best a particular way to alleviate head pain. And once we realize that we are “purchasing” the service “alleviate head pain” then you can easily understand that there are myriad ways to do it. When I was little, my old Italian grandmother would have recommended a slap a flank steak on my head. She once sliced potatoes up and placed them around my head wrapped tightly in an old t-shirt. When other things get more expensive, then these “remedies” become more attractive. And when these remedies are inexpensive we do more of them too. So, indeed, a “flank steak is not a flank steak” either! Why? When the tradeoffs you must make to get 8 ounces of flank steak are substantial, you probably use flank steak only as a slow cooked delightful meal. But if it gets less and less expensive, you use “flank steaks” as inputs into more and more “consumer” goods. You may begin freezing some for future consumption. They get cheaper and you may buy some for your friends. They get cheaper and you may use them to feed your Boston Terriers. They get cheaper and you may use them as arts and crafts. They get cheaper and suddenly you make them a part of your home headache remedy repertoire. There is NO CORRECT way to consume a flank steak – since value is subjective and each of us sees a flank steak as an input into some other service we wish to provide for ourselves.
This insight is extraordinarily powerful.