The Cost of Anything is Everything

October 4, 2010

Money was the first universal standard of value. While even today there is not yet a universal unit of money, the art of trading the coins of different nations at some fair exchange rate is well recorded in some of mankind's earliest documents.

Economics got its modern thrust largely from Adam Smith's Wealth of Nations, published in 1776, and still probably the best single book on econmics ever written. Carl Marx shocked the political and economic world with his mid-18th century Labor Theory of Value in which he noted that all productive economic activity involved human labor. If one allowed that all human time spent in productive work was of roughly equal value (or took into account qualitative differences in individual efforts, and used the average as a standard hour of labor), one could see that anything from a bushel of corn to a railway locomotive could be seen to have embodied in it some number of hours of human labor.

The labor theory of value is interesting, but has had limited use. More recently there have been numerous descriptions of how economic activity can be measured in terms other than money. One of the most commonly cited lately is energy. How much energy is used to cool a house, grow a head of lettuce, serve up a Facebook page? Popular press articles act as if these quantities are simple to calculate. But they are not.

Taking one example, measuring the energy required to cool one house on one hot summer day seems easy enough. You just put a meter on the outlet leading to the air conditioner. But what about the cost of the air conditioner? Why, its money cost should be depreciated over the life of the machine, and the energy costs of producing the machine accounted for in a similar manner. And what of the house itself? Should we depreciate the insulation? The roof? The cost of the foundation, or the power lines, or the road to the house?

I say, why bother with all that. If energy really is the secret currency of our time, it should show up more or less accurately in all pricing. The price of something corresponds pretty well to the energy that went into the something. A Prius actually wastes a lot more energy than a Ford Focus, because the initial price shows how much more energy was needed to produce the Prius. Better gas economy over the lifetime of the car won't compensate for the intial energy cost differential.

The cost of air conditioning in dollars, and depreciating the cost of the air conditioner itself, captures energy units used almost as well as more detailed systems

There are many items besides energy that go into everything. Research and development expense is an interesting universal. Look around you: everything has been improved by research and development. Gas motors and electric motors, the bread from the wheat produced by scientific farming, the special machines of bread baking factories. Even when inventions are ancient, like paper making, smelting metal, and cloth production, R&D has been at work making improvements in what we actually use or how it is produced. Generally speaking, modern goods are created with less labor and more capital investment, thus upending much of the thinking that went into the labor theory of value.

The almost total interconnectedness of almost all things used by today's humans has become the fundamental reality of this era. Almost anything can be used to measure the cost of all other things, if you want to. Tantalum metal for capacitors, which are used in communications and information processing, which are used in all production and distribution of goods. Corn itself, which is used to grow new human beings as well as food animals. Nitrogen-based fertiliser, without which everything, and I mean everything, would collapse in two years. Water. Coffee. Antibiotics. Plastic. Education. Even Law, medical services, or accounting.

In this column I mainly write about individual technology companies and their prospects for future growth. We have seen in the recent global economic downturn how financial prospects are interwoven, and how good people and companies can be hurt when bad practices (predatory lending and credit bubbles, for instance) undermine the rest of the production system.

It would do well to keep in mind that the cost of anything is everything. If I buy a new car (I am at that point), it seems to be a discrete thing, bought in a discrete transaction. But any new car contains parts made by hundreds of companies. The employees who make the car and its parts consume goods made by hundreds of companies. The engineers who designed the car based their efforts on hundreds of years of earlier science, technology and engineering. The option of buying a car would not be available to me if it were not for a complex global network of people and things.

The system of production also produces negative side effects that society is slow to deal with. Air and water polution, crime of many sorts, even war. Everything we buy, and every service we consume, could be measured in terms of these negative valuations as well.

The cost of anything, of any particular thing, is everything. That is just the nature of society. We can make individual adjustments to the mix. That is what humans do when we make the choices in our lives.

William P. Meyers

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