The Unbroken Window

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.

• It informs how we think about whether “actual” producers have market power over consumers – if indeed there are myriad ways for us to satisfy wants, then the sway any one producer of one particular way of meeting those wants is far more limited than a literal description of their capabilities is. So, while there is only a single, “monopoly” seller of satellite radio services, and you may think they have massive market power over us since we have no choices about buying satellite radio, when you realize that “satellite radio is NOT satellite radio” you will also realize that it’s hard to make money, much less survive, as a seller of “satellite radio.” Why? Because they’re not selling satellite radio, they are selling one particular input into the service “music to listen to” or even more generally the service, “ways to be entertained.” And we all know full well that there are many, many other ways that we can use to meet those consumption needs.
• It informs the idea of “waste.” When you understand that there is no “right” way to consume something, waste, much like cost and value, is also subjective. You are only “wasting” something when you could have more efficiently obtained the service that you want. So, it is not wasteful to play baseball with an orange if that is the “best” way for you to meet the demand for the service, “joy of hitting a round object. That someone else objects to your hitting an orange with a bad is presupposing that there is a correct way to consume an orange, and that is as food. That’s wholly aside from the fact that we grow all kinds of things and don’t eat them – after all the bat you use to hit that orange was derived from a tree grown for that purpose – and that is no more or less wasteful than using an orange as a baseball. You object? Really. Using a tree as a baseball bat means that land cannot be used to grow oranges. And so if you accept that hitting an object with a Louisville Slugger is OK, then you are saying that “wasting food” is OK. Just because you cannot see the “wasted” orange doesn’t mean at all that it is any different. So, commands to “reduce waste” are nothing more than commands by other people to do what THEY want you to do, and not for you to do what YOU want to do. And this is wholly aside from the vastly misunderstood concept of what waste is, and whether it is a problem. Here is one particular illustration.
• You can now come to the appreciation for why central planning and socialism CANNOT work. It cannot work, not only because people are not angels and not always altruistic (I wouldn’t want to live in that world anyway). No, even in a world of angels, socialism can’t work because the knowledge requirements for it to work would choke the world’s most amazing supercomputers. It simply cannot be calculated on any human-machine interface. Ever. Just think about headaches. How would a central planner know when anyone even had a headache, or why they got it? How would it even know what is in the choice set for all people in terms of how they might deal with their headache? How would it know how each person ranks each tradeoff? How would it know where each of the ways to cure headaches is located, and what it requires to deliver them to each person? How would it know how consumers in India making choices about headache solutions impacts the availability of other solutions in Alaska? And when folks preferences or tolerances change, how would that all get transmitted to a computer, processed, and then sent back to each of us as consumers about the “best” way to solve our headache problem? And that’s just headaches, and that’s just today. Imagine this problem for tens of billions of goods and services, being constantly computed and updated and transmitted to every one of us at all times. It’s preposterous that anyone is even doing this at a Gedankin level, much less having actually inflicted this insanity on real, living, human beings.
• So our understanding of the value of prices, property rights and the market system as superior ways to organize large commercial societies does not require a morality tale, it requires only an appreciation for how complex the real world is, and an appreciation for exactly the kind of knowledge that is embedded in even the most mundane of decisions that each of us diverse individuals makes thousands of times each and every day. But it’s hard to condemn that aspect of human nature, so that’s not what “socialists” and collectivists of all stripes spend their time doing. In fact, they are the real alchemists. Focusing on the immorality of property rights and markets is worse than a red herring. Not only can we have the argument about which “institution” is more moral (is that even a correct framing?), but we don’t need to. The right argument is which institution can generate, process and transmit knowledge peacefully and efficiently – and central planning fails the test. But it’s not satisfying to talk about the limits of knowledge. So we don’t see that argument. And instead market “defenders” end up playing on the turf of those who truly are the “deniers” in the most scientific meaning of the term, much to the detriment of all of us.