That day in May

On May the 14^th, 1940 general Schmidt issued an ultimatum to the Dutch forces defending the city of Rotterdam: he would wipe out the city if the Dutch do not cease to resist. In fact, two groups of bombers were already in the air when the ultimatum was issued.

Although the Dutch side responded with readiness to begin the negotiations, Schmidt’s telegram to the air forces ordering them to return to the stand-by status was not relayed on time. The faith of Rotterdam was sealed: 1300 bombs were dropped in the residential areas and the historic centre, killing nine hundred people, and wiping out the medieval city centre.

Today, Rotterdam is a vibrant city with a city centre architecture that is non-characteristically modern for the Netherlands. The few historic buildings and structures that survived the bombing are cherished and defended by Rotterdammers as pieces of their city’s painful history. One such structure that miraculously survived the bombing is Koningshavenbrug, or De Hef lift bridge. Built in 1927 over the river Maas, the bridge has a protected heritage status. The city authorities paid for the renovation of the lift section in 2014, which was finished only in 2017.

You can imagine the surprise of Rotterdammers, when in February 2022 the city authorities announced that the bridge would be dismantled again to allow passage for the newly built superyacht Koru belonging to Jeff Bezos. Koru was built in one of the docks upstream of the city, and its masts were too tall to pass under the lifted bridge.

But people would not have it, as Dr Petra de Jong, behavioural scientist Erasmus School of Social and Behavioural Sciences is quoted saying: "Rotterdammers are extremely proud of the iconic places in the city. Especially the objects that survived the bombing of May 1940. If you touch these, you touch them." An equivalent in Paris would have been a request to temporarily remove the Eifel tower so someone could put up a tent instead.

As usual, the mayor’s office put forward the “strong” economic argument: construction of the boat created jobs and brought many economic benefits. After all, Jeff Bezos would foot the full bill of removing and reinstalling the bridge.

The Economic argument

How much economic benefit can one man’s little amusement boat bring to one of the richest nations in the world? The boat in question – Koru, is a luxury 3-masted 127-meter sailing yacht with a price tag of about $500 million and an accompanying 75-metre $75 million (that is a bargain price of $1 million per metre) yacht support vessel. Yes, it is impossible to land one’s helicopter on a sailing yacht, so large sailing yachts have support vessels tagging along with a crew of 30-40 people.

The total sum involved of €600 million is the size of the GDP of a small island state. But for the Netherlands, with its nearly € 1 trillion GDP, this was not a large amount. Still, the politicians and businesses think in terms of GDP growth, not GDP level. The average GDP growth rate in the Netherlands from 1990 to 2024 was only about 0.6%. This means that Bezos’ amusement boat would create a 12% bump in the Dutch GDP growth rate if paid in one year.

If you are a politician and you are given a chance to lift the GDP growth rate by 12%, that is a very convincing economic argument: with one signature you are 12% farther in the global race of GDP growth rates. With a few signatures like that you might even deserve an economic moniker of your own, like “Asian tiger” but for the Netherlands: “tulip tornado” or “polder powerhouse”? Needless to say, as a lowly elected mayor of an egalitarian city, doing a favour to one of the richest people in the world is the cherry on the cake.

On the flip side, the moniker could be more along the lines of “leprechaun economy” as Ireland’s 22% GDP growth was dubbed by Paul Krugman, after Apple moved its intellectual property to Ireland for tax reasons in 2015 and caused such a sizeable increase in GDP, but absolutely zero impact on the welfare of the Irish people.

Eventually, the city of Rotterdam had to refuse the permit to dismantle the bridge after the people threatened to attack the passing yacht with eggs. The yacht had to be assembled in a different dock and made the voyage without the masts.

GDP or Grossly Distorted Priorities?

Hundreds of similar decisions are made by mayors, ministers, and other officials at various levels daily in a country, and the impact on the GDP growth rate and jobs is often the winning argument. But does every increase in GDP growth rate warrant the same consideration?

Gross Domestic Product as a measure of economic performance has had plenty of criticism over the years. True that it does not consider work carried out at home or for free, it ignores the shadow economy, it does not consider income distribution or the damage to the environment, but at least we would hope that what it does measure, it does so effectively. Is this the case, though? If GDP is a valid measure, or a key performance indicator, every 1% increase, if legally and fairly obtained, should have comparable positive impact on peoples’ lives.

Let us consider the €600 million windfall that Bezos’ joy ride brings to the Dutch economy. This is 0.06% of the economy and 12% addition (note: not percentage point) to the GDP growth rate. We could compare the impact of the yacht with a similarly sized (i.e. €600 million) housing project, for instance. Netherlands, as many of its neighbours, is experiencing a housing crisis as the demand by far exceeds the limited supply.

If GDP is a reasonable or useful measure of economic performance, then the two projects should have comparable impact on the welfare of the Dutch people. The first impact to consider is the result of the project: what is produced of value to the people?

The positive impact of the yacht project benefits Bezos and his immediate family and friends, let us assume that is 20 people. Of course, as the mayor of Rotterdam suggested, the project provides jobs to everyone involved in building and transporting the yacht. For a large project like that, it could be an estimated one thousand people.

The same budget of €600 million in 2021 would yield 12,400 apartment units or help house about 36,000 people. Since building is an inherently less productive industry, the project would provide direct and indirect employment to about 5,000 people. Yet, when it comes to the GDP impact, both projects have the same value.

Imagine that you work in a company where your job description is to help as many people as possible. But when it comes to your performance assessment, the key performance indicator (KPI) your company uses makes no difference whether you helped 36,000 people or 20 people. Wouldn’t you complain to your manager about the Grossly Distorted Priorities?

Trickle-down or hoover-up?

This impact estimate does not consider the self-perpetuating effect of inequality, which is an overlooked problem. The ridiculous trickle-down economics (the notion that creating large profit opportunities for businesses eventually results in benefits to poorer people) is not only faulty, but the total effect is the reverse.

Most industries catering for luxury products have a small proportion of costs spent on labour and a relatively large proportion – on materials, advertising and profit margins. By contrast, most materials used in mass market products are commoditized and cheap, while the margins are low. As a result, a larger proportion of the money spent goes to labour, which then results in direct spending on essential items, creating an income for someone else – a strong multiplier effect.

Luxury spending, on the other hand, creates pockets of accumulated cash in the form of margins and rent, which results in more luxury spending. This crowds out other uses of assets and capital. Unsurprisingly, this creates a fertile ground for developing more luxury offerings in the economy at the expense of mid-market offerings, a form of a hoover-up economics whereby the resources are progressively sucked up the income ladder.

Was it meant to be this way?

Attempts to define a single measure for economic performance had been made long before the twentieth century, but the source of GDP as we currently use in the National Accounts is traced back to the original work carried out by Simon Kuznets, particularly in the congressional report titled “National Income, 1929-1932”. Unfortunately, as it often happens, the concept of National Income and later – GDP, were embraced by governments without much reservation despite the warnings of the very people who produced the original work:

“… in a nation with a rich upper class, the personal services to the rich are likely to be valued at a much higher level than the very same services in another nation, characterized by a more equitable personal distribution of income. A student of social affairs who conceives of a nation's end-product as undistorted by the existing distribution of income, should again have to qualify and change our estimates, possibly in a marked fashion…Economic welfare cannot be adequately measured unless the personal distribution of income is known…The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.” National Income, 1929-32, Page 7

Kuznets expressly warns against welfare-related policy decisions based on the measure that he helped develop, yet most of the policy discussions in the corridors of power are intentionally focusing on the GDP number.

Why does it matter?

Policy initiatives discussed at various levels in the governments are often presented in the context of their impact on the GDP growth rates. Even the staunch critics of policies that result in tax and corresponding welfare spending cuts are caught in a false arithmetic tug of war: x% loss in spending/consumption due to the cuts compensated by y% increase in GDP growth rate. But as it was just demonstrated, 1% GDP growth rate can benefit either 500,000 people or 50 people.

In the US, the Joint Committee on Taxation and the Congressional Budget Office are responsible for tallying up the costs and benefits of proposed legislations. The decisions are driven by the high-level impact on the budget deficit, debt, and GDP growth rates, but there is virtually no emphasis on the costs for whom and benefits accrued to whom.

By far the most damaging effect of this myopic focus on the wrong indicator is the wholehearted belief of the legacy political parties and media in the US and Europe that the Western economies are well managed and healthy, with decent GDP growth and employment numbers.

Since the GDP and employment numbers are reasonably high, the US economy is doing MUCH better than people think.

The message from left-leaning media throughout the 2024 campaign was both arrogant and ignorant: “It’s all in your head, in reality, you are doing MUCH better.”

But as it was demonstrated, GDP or even employment numbers do not mean peoples’ lives are better (or worse). In fact, they may not mean anything useful at all! What was the post-Covid life like for the average and poorer 25 percentile of the wage earners in the US given the unequivocally roaring economy according to the Grossly Distorted Priorities?

On the average, food and housing prices have increased by 28% since January 2020. Average hourly earnings have successfully kept up with this increase, up over 26%. But when it comes to the lower 25^th percentile of the income earners, their income has been down since 2020, rendering them 32% poorer and unable to afford food and shelter.

What about the strong employment numbers? Well, if one must have two jobs to pay for 32% higher food and housing prices, then that is what one does! Shall we all celebrate the miraculous job numbers created by the Biden administration? Congratulations, you are now lucky enough to work 30% more hours to afford the same roof over your head as before!

But how about those who lost their jobs due to the Covid and never manage to get back to the employment? There are about 1.9 million people like that who have lost ALL their earnings.

And here is the last question that is more rhetorical: how many people switched their vote from Biden to Trump in 2024 and why? Is it just in their heads or are we collectively using a gauge of economic performance that is not only useless but outright toxic?

-WH

“Look at Mrs. Jones!”

The 1881-82 issue of The Banker’s Magazine and Statistical Register contained a brief article titled “Remarkable banking” – one of hundreds of truly forgettable articles on topics ranging from taxes in Turkey to losses in the French panic. Apparently, the shares of Chemical National Bank had reached $1780 – “the highest quotation of any banking house in the world”. The founder of the bank – John Mason, having failed in the chemical business, was left with a banking licence (“privilege”) and went on to build a successful banking business, with resulting:

John Mason’s fortune went to his children and their spouses, among them – Isaac Jones. The Joneses were astronomically rich by the standards of the time, and began spending the fortune on building country villas in the Hudson Valley. As each villa was grander than the previous one, other wealthy families felt obliged to compete with that opulence, but “keeping up with the Joneses” was difficult. This term was later popularized by Arthur Momand in his eponymous comic strip in 1913.

Today, as ten thousand years before the Joneses ever set foot in New York, we are hard-wired to mimic each other as an effective way to connect and cooperate. Successful cooperation helped us eliminate natural predators in our environment and adapt to the elements.

But just like our bodies are wired to have insatiable appetite for fat and sweet food, our mimicking behaviour left unchecked can be a serious health hazard.

We may have inadvertently built our whole economic measurement and policy infrastructures on the back of our desire to mimic, and there is no physician that can put us collectively on the “scale” and warn us about the negative effects.

The hedonic treadmill

Moving into a new neighbourhood and taking a new, higher paying job can be a fantastic opportunity for a better life, but it comes with implicit requirements of dress code, brands, cars, hedge trimming equipment, lawn mowers, solar panels on the roof – anything that signals the fact that we belong.

We begin to enjoy the new neighbourhood, and even the new hedge. For about a month. But then unnoticeably the novelty wears off and with it – the sense of elation and achievement. We hit the hedonic treadmill.

Hedonic treadmill refers to our inability to feel happiness or elation for an extended period of time. Research has shown that people have set-points of “happiness” defined by individual genetic disposition to feel happy. Any improvements in the financial situation, new purchases or career advancement increases the degree of experienced happiness only for a short period of time, after which we revert back to the set-point.

Early empirical studies of hedonic treadmill in the 1960s and 70s showed that the happiness “set-point” is impossible to change permanently. The way to keep the flow of positive emotions is by buying more. Each purchase causes a new temporary high, but the next purchase has to be even bigger and more impactful.

The toxic cocktail

Each trait taken separately has its evolutionary purpose: mimicking helps us cooperate, while the hedonic treadmill helps us limit energy consumption. In the modern economic context, however, the two traits conspire to play havoc with our lives. To illustrate this, consider the story of Grace, retold from one of thousands of online articles on the subject:

Clearly, Grace is all too well acquainted with the short-term high of the hedonic treadmill, while the urge to spend and the ideas come from her environment: “…Because I have been working in financial services for 10 years, I am well versed in how I should be doing these things. In my position at work, I manage millions”.

Before the reader jumps to the conclusion that one woman with shopping addiction does not make a trend, a recent study carried out by a group of researchers from National Formosa University, Taiwan and Berkley identify a strong tendency of shopping addiction to relief stress among a sample of 380 graduates, of whom 68% male and 32% female.

Remember our personal set-points of happiness? Taken individually, our set-points would just keep us wanting things at a steady pace. But if Grace’s set-point depends on her colleagues’ purchases of bags, shoes and holidays, then everyone else’s purchase puts Grace below her set-point of happiness. This means everyone else’s purchases make Grace less happy than her natural state. She has no choice but to buy.

In a simulation model developed by Alastair Langley from Bristol University, this toxic cocktail results in higher income (marginal cost of consumption) reducing welfare!

But what is the problem with Grace, her colleagues and all of the students at university of Taiwan consuming all they want and feeling happy? After all, most people unlike Grace are perfectly capable of managing their impulses and keeping their consumption levels within their means. Unfortunately, as we shall see, the problem of the toxic cocktail and our inability to reflect it in the economic policy has negatively affected whole societies in a measurable way.

Textbook Economics take on human nature

Economic thought has progressed considerably when it comes to human behaviour. Fields like behavioural, institutional and evolutionary Economics have relaxed many unrealistic assumptions about human behaviour. But one thing has not changed: the way we measure the ultimate goal – welfare or utility achieved through consumption.

All warring economic schools, to the extent they define any end goal, focus on the sum of utility gained from consumption.

Incidentally, the sum of all personal consumption, albeit in money terms, is a key ingredient of the main gauge of economic prosperity currently used by policy makers worldwide – Gross Domestic Product (GDP). As far as GDP is concerned, the more Grace, her loved ones, Taiwan university students and everyone else consumes, the better our economy performs.

The hamster wheel ignored by Economics

Grace’s total utility would be the sum of utility she receives from purchases today and every other day in her life, and the sum of all the utility her fiancé – Oliver receives through his life, because Grace cares about Oliver. If the society consisted of only Grace, her fiancé, her colleague Justin and his wife Amelia, the total utility of the society would be a simple sum of all utilities:

But our toxic cocktail implies something entirely different. Remember, that if Justin (Grace’s colleague) buys a new toy, let’s say (pun intended) a new treadmill and posts the picture on Facebook, it makes Grace less happy compared to her set-point!

That means, when Justin or Amelia buy the treadmill, any gain they have may be offset by the loss in happiness that Grace and Oliver experience from their set-point. So the additional purchase of Justin and Amelia may not add anything to the total social benefit – a form of a society-wide hedonic treadmill.

(to answer any criticism of the mathematics involved: I understand the equation must look at the first difference, but this is just a simple stylised representation to make a point)

All the while, the GDP would reflect the new purchase and show a clear improvement in social benefit. Worst of all, the society cannot improve the total welfare by additional consumption – it’s stuck at the set-point. But things are actually much worse!

Lost TIME

Early research on hedonic treadmill was revisited and expanded, and recent broader studies suggest that:

• some new spending on physical goods does succeed in moving the happiness set-point permanently, particularly when it comes to owning basic necessities such as shelter (owning a home) and food

• spending on experiences does create more sustainable happiness

• more strikingly, life goals of purchases appear to matter: goals such as “commitment to family, friends and social and political involvement” successfully move the set-point upward, while zero-sum goals, such as commitment to career success, material gains, appear to be detrimental the happiness set-point.

But revisiting our Economic utility equation armed with this knowledge raises an even more troubling observation: in our original assessment, when Grace mimics Justin and buys the new treadmill to catch-up with him both families are now $5,000 poorer. In order to pay back this new debt (or earn back the spending power), the two families need to spend more time at work. Time that they could have spent on experiences that don’t cost money, such as family, friends, community, i.e. things that have been shown to successfully and permanently increase the happiness set-point.

The economic utility formula ignores TIME – the only truly binding limit that Grace, Oliver, you and I have. It ignores time that we could use on activities not involving any exchange of money, but positively and permanently altering our long-term happiness, focusing instead on consumption that is detrimental to our wellbeing, as it creates new time commitments.

Since GDP is a reflection of the consumption-centric economy, higher GDP growth rates not only do not reflect improved welfare, they may actually have negative relationship with welfare (before the whole Economics profession comes down with vengeance on me with data from World Happiness Report and its strong correlation with GDP growth rates, please bear with me until the essay #6 on happiness).

So what is the alternative then, if GDP is not a good measure for our wellbeing? Can we look at the time instead?

Welcome to the real world

If free time is a key incredient for happiness, how much leisure time do we have in absolute terms and compared to the history? How well do the countries perform in this sense?

Fortunately, that data is available at Our World in Data. Unsurprisingly, individuals in Germany, Netherlands and France have 12%, 10% and 7% more time outside work per week than in the USA. Inclusion of Finland in the list is not arbitrary. Finland is consistently at the top of happiness surveys, which on the surface appears to contradict our data of limited leisure time, or possibly raise a question about the usefulness of happiness.

An even more curious conclusion is drawn from the historic analysis of improvement in spare time. What has been the progress (economic growth) if we measure what counts?

Despite considerable improvement in the way we produce things over the years (productivity gains), the USA has shown very limited real economic improvement measured in time – less than an hour! In contrast, Germany, France and Finland have added 8, 5 and 3.6 hours of leisure time per week respectively since 1980.

Put it another way: Americans have worked for the sake of working since 1980s.

The reported numbers are average numbers across the economy. But researchers indicate that there is an emerging polarization in the numbers: working hours of highly educated, high-wage, salaried and older-aged men has been increasing.

This was not always the case: most economies (including the US) have delivered considerable improvements in leisure time since 1800s. But the gains have slowed down since 1980s and disappeared altogether in the US. Why?

The hamster wheel

Estimates of working hours in hunter-gatherer societies are around 20 hours a week. Transition to farming increased this number, but created useful seasonal breaks.

The first strong wave of increase in working hours happened in the beginning of the age of industrialization, as people moved from seasonal farm work to hourly work in the factories. At the peak in the 19^th century, typical work week in most industrialized economies was nearly 70 hours! This was not by choice, but as an outcome of imposed contracts that maximize profitability, with physical health being the only limit to further increases.

Reduction of working hours until 1980s was achieved by collective bargaining power (trade unions) and regulation (government), not by the market forces. But since 1980s the progress was dealt a triple blow:

1. trade unions were intentionally and substantially weakened in the US and the UK,

2. introduction of magnetic stripe on credit cards in 1970s made their universal acceptance a possibility by the early 1980s

3. planned obsolescence became widely adopted by companies in 1960s-70s after the success of bringing the holding period of a new car from 5 to 2 years by General Motors.

The combination of these factors (and a few others) brought us to a point where Grace, her colleague, you and I are forced into a cycle of consumption to the detriment of our wellbeing. All the while, our economic performance indicators have taken the role of college game cheerleaders: we still measure our policy successes and failures by lauding employment, consumption expenditure and income that merely reflect the speed at which the intentionally constructed hamster wheel spins.

Any suggested shift in policy is examined firmly within the confines of consumption metrics (GDP growth rates) that have nothing to do with appropriate goals for the society. The alarmist report issued by Mario Draghi specifically cites GDP per hour and per person employed as an evidence that Europe is doing worse than the US economically. The conclusions of this report have already been partly accepted by the European Commission as a work plan for the next 5 years.

It appears that our governments and policy makers are caught up in their own hamster wheel of keeping up with the Joneses. At this pace, we are very likely to end up like the Joneses:

-WH

The ultimate scarcity: the Great Famine

David Moore, the director of the Royal Dublin Society’s botanic garden at Glasnevin, made his first troubling discovery on the 20th of August 1845. Moore had the first recorded observation of what would later become known as the Blight – the disease that decimated potato crops in Ireland in 1840s, causing mass death and emigration between 1845 and 1849.

“Gorta Mór” or the Great Famine took an estimated one million lives, two million people emigrated from Ireland in the subsequent decade, bringing the population that was growing steadily until then down from 8.2 million to about 6 million in 1855. By 1901 Ireland’s population fell to 4.4 million due to the trauma, reduced fertility rates and economic hardship in the wake of the famine. Ireland’s population never properly recovered from this tragic event.

Frightening as these numbers are, they fail to convey the true degree of the tragedy. One commander from the British navy recalls his observations in Cork county on 15 February 1847:

Any famine emphasises the fundamental economic principle of resource scarcity; Mother Nature herself dictates the limits to available resources. But not without a lot of help from mere mortals, as we shall see.

What caused the Famine?

The potato was introduced in Ireland in 1580s and quickly grew to become a dominant crop due to its tolerance of the wet and cold climate and good nutritional values. By 1840s Irish potato crops reached 15 million tons annually, of which 7 million was consumed by humans, with the rest used as animal feed, seed and export. In the early 1800s, an adult male laborer in Ireland consumed 6.4 kg of potatoes a day. The poorer part of the population depended entirely on potatoes and buttermilk for their dietary needs.

It is in this backdrop that David Moore draws a troubling conclusion based on his observation of potatoes in the botanical gardens: the mystery disease impacting potatoes in parts of Europe and now in Ireland is likely to be a fungus. DNA analysis carried out in 2007 using the fragments of the pathogen from the sample supplied by David Moore confirmed that the source of this Phytophthora Infestans fungus was the region of Andes in South America.

The impact on the Irish potato crop was devastating: crops fell from the pre-blight 15 million tons to 1.2 million in 1846, 1.7 million in 1847 and 0.5 million in 1848. This was nature’s ultimate statement of need, a frightening exhibit that the law of scarcity in Economics is as immutable as the law of gravity in Physics.

Scarcity or choice?

A closer inspection of the circumstances of the Great Famine, however, paint a completely different picture. Ireland joined a union with Britain in 1801. So the question of whether there was scarcity must be considered in the context of Britain – the greatest economic power of that time. Could Britain afford to remedy the situation and avoid the devastating famine in Ireland?

Based on the nutritional values and the number of people, Ireland needed 2.5 million tons of grain a year to substitute the missing potato crop. Wheat was an expensive option, so the British government imported and distributed the considerably cheaper maize (Indian corn) from the US, albeit in very small volumes of 100 thousand tons, which was incidentally sufficient to avoid deaths in 1845. The cost of imports and distribution of 2.5 million tons of maize, even accounting for rising prices would be in the range of £25-30 million.

This is no small change, of course, considering the estimates of overall GDP levels at £400 to £500 million. But the question remains – could the government manage to finance at least a partial (if not full) relief? Was there a precedent of financing of major government spending at that time? Well, how about the Napoleonic war? British government spent an annual average of £60 million during the Napoleonic war, financed with excise and customs duties, income tax and long-term borrowing.

That still does not fully negate the fact of scarcity. Surely Ireland by itself, without help from the British government could not sort out the issue? But despite the famine, Ireland continued to export grain (wheat, barley) to England and elsewhere throughout 1840s. Granted that the exported grain volume was low, but the exports were of higher value grain. In value terms, Ireland’s own grain export could have been in the range of £20-40 million!

What stopped Ireland from banning exports or using the export proceeds fully to meet the needs of the population? The quick answer is a combination of:

• land ownership and rent structure (export crop owned by land owners)

• central government’s full belief in self-dependence and free markets

A good indication of the prevailing moods in the British government could be expressed in this passage borrowed from a historian and author Christine Kinealy’s book on Irish famine. The passage is an extract from a letter of Charles Trevelyan, who as assistant secretary to the Treasury at the time managed the Treasury’s purse when it came to the relief efforts:

“That indirect permanent advantages will accrue to Ireland from the scarcity, and the measures taken for its relief, I entertain no doubt. . . . Besides, the greatest improvement of all which could take place in Ireland would be to teach the people to depend upon themselves for developing the resources of the country . . .” (Trevelyan to Routh, 3 February 1846, p. 77).

Reluctantly glossing over the dubious morals of the statement, we are left again with the all-powerful principle of scarcity invoked here. But the real driver behind the refusal to do more to help the population is the fundamental belief in the sanctity of the unincumbered (or free) markets.

Ah, but were the markets really free? Did all participants have a free choice? What choice did Irish farmers have at the time?

Monoculture or death

A key natural reason for the famine was the concentration of all agriculture on a single crop. However, Irish farmers had no choice in this matter. Land was owned by aristocracy and let to middlemen, who then sublet increasingly smaller plots to a larger number of farmers. The level of rent was driven by the crop with the highest yield and the least required effort, as many farmers had to work on the owner’s land in lieu of rent payment. Farmers did not have a choice of diversifying the crop to limit risks, as that would make the rent payment impossible.

Ultimately, this version of the free market diverted all the upside from the high risk of single crop to the government and the aristocracy in the form of taxes and rent, and offloaded the risk to farmers who had no say in this “contract” and as Charles Trevelyan put it, had to be taught to depend on themselves.

As it happens, the Irish Famine is only one engineered scarcity event in a string of events, including the Great Chinese famine, the Holodomor, the Bengal famine, the Ethiopian Famine – all cases that had nothing to do with true natural scarcity in the spirit in which Economics textbooks discuss scarcity.

Where does scarcity come from?

The real scarcity is an outcome of the adopted or imposed rules of the game - ideology and regulation. Let’s look at another example to better understand the issue of scarcity.

Drew Curtiss set up Fark.com as a news aggregator in 1990s. The website itself is not remarkable or unusual, but what happened to Drew is very telling. The idea was to collect curious news items on a website instead of exchanging emails with friends (remember, this is pre-social media). But Drew’s firm was sued for patent infringement in a patent troll case in the US. The claim was that Drew website infringed on the patent, which describes “Writing three key messages … two to three statements that support the HEADLINE and entice the reader;…”, in other words, this was a patent of something that everyone would consider a part of writing a message.

Such a patent grants the ownership claim for simply writing a message, and while probably unenforceable in the court, can be used by the holder of the patent to extort hundreds of thousands of dollars from victims, since defending against the lawsuit would cost over a million dollars.

Austin Meyer an aerospace engineer, computer programmer and the man behind Xplane flight simulator software was himself sued by a patent troll and made a documentary covering many similar cases of patent trolling. His main message was that none of these suing firms actually created products, services or used the patents themselves in any way. But patent trolling is not a bug in the whole intellectual property field, it is a feature!

A simple abundant and unrestricted resource, such as writing a message, can become scarce and cost money, if we impose an ownership rule. The reader might argue that patent trolling is more of an exception rather than a rule, that patents are far more clearly defined in more serious intellectual property cases. But if merely writing a message appears to be a no-brainer and unworthy of a patent to regular people, most experts would find the contents of most patents in their specialist fields a no-brainer or common knowledge. Intellectual property laws are designed to create and exploit scarcity where no such thing naturally exists.

How about scarcity in the tangible world?

Surely there must be real constraints in the natural world, particularly when it comes to the natural resources, for instance, the resource for which dozens of wars have been fought - oil? The world’s obsession with the peak oil theory – the idea that we will run out of oil, started almost as early as the commercialization of oil.

Nothing like an occasional manufactured panic of the world running out of a resource to prop up prices or induce more preferential regulation, which explains occasional press articles about collapse of oil supplies. This is a very common tactic not only in the oil but virtually in any industry that can place remotely credible claims of scarcity. A war in Russia? The world will run out of neon, sunflower oil, gas and electricity. Covid? The world will run out of toilet paper, medical equipment, test kits and everything else.

Yet it is remarkable how the world managed to get by without a hitch even with nearly 25% of the population in the industrially developed countries out of work, or pretending to work from home.

The only reason we did not experience mass starvations similar to the Great Famine is that the modern governments are (for the time being!) more democratically accountable and were forced to act to change the rules of the game. There was no real impactful scarcity of resources.

Despite years of sanctions and the devastating war in Ukraine that consumes an estimated $ 500 million per day(!) of Russian resources, an average person in Moscow still consumes the same products bought in the same supermarkets and an average person in Tyva still can’t afford the minimum required to sustain life. Ownership rights, government control and imposition of the rules of the game are the core drivers of scarcity during the Covid, in Russia and in the oil markets. The worst oil crisis that the West ever endured had only a political cause and nothing to do with physical scarcity.

Of course, there is clearly a physical limit to the quantity of oil and other resources on our planet. This is a Physical argument that has always been used to create the basis of the scarcity myth. But what if any physical limit of resources is not binding in any practical way?

Our ability to adapt is limited only by time and our evolving preferences. In the aftermath of the oil embargo in 1973 the US oil consumption fell by nearly 20% simply by redesigning the vehicles and buildings. The society adjusted its preferences and in a few years required 20% less of the resource. This raises the question of preferences or desires and their relationship to scarcity.

Unlimited desires and scarcity

One unassailable argument in favour of the scarcity fib is people’s unlimited desires. An Economics 101 student accepts at face value the “fact” that people’s desires are unlimited. The conclusion of scarcity is natural, since there is no physical quantity of resources that can meet unlimited desires.

What is often overlooked is that the student accepts this premise only by observing the society in its present hyperconsumerist and commercialised state, where every human feeling from love (Valentine’s day) to benevolence (Christmas) is commercially repurposed to create desire for things.

A very important question that fascinated clever minds for centuries has been sanitised from the body of scientific knowledge of Economics. Should we accept that human desires are unlimited?

Humans are carbon-based life form that naturally require about 3 kWh (2500 kcal) energy per day and operating temperatures of between 18 °C and 25 °C. We have a body with certain dimensional limits. The need for food (energy) and shelter (temperature) that are necessary for our existence, have a natural limit expressed by the numbers above. In fact, anything significantly more than these numbers will be absolutely harmful to us. So why insist on this idea of unlimited desires if the clear limits are in our nature?

There was time when the clear limit of our natural biological desires was accepted and understood across the spectrum of conflicting schools of thought. Plato in his magnificently totalitarian and reactionary “Republic” does distinguish between the necessary and unnecessary desires:

Later Greek philosophical schools of stoicism and epicureanism disagree about most things, but find a strong agreement on the distinction between natural and necessary and unnatural or unnecessary desires. Epicurus goes even further stating that:

This last simple sentence paraphrased in the modern language means that natural human desires are limited and there is no real scarcity when it comes to satisfying those desires.

Can the planet sustain us?

Epicurus’ statement was probably true when the world population was at most 100-200 million. How reasonable is it to assume that our planet could sustain the rapidly rising population currently at around 8 billion?

The degree to which our collective ability to produce food has improved is often underestimated. Today the world produces sufficient amount of food to feed by different estimates approximately 9 to 10 billion people, albeit a large part of it is wasted and lost in distribution or simply denied to few hundred million people who starve.

While the rate of population growth is falling, the rate at which we get better at producing food (total factor productivity in agriculture) keeps increasing. This is a very divergent picture from the one Thomas Malthus painted in the nineteenth century (and inspired, among others, the British government’s atrocious response to the Irish famine).

Even considering the environmental sustainability constraints (including the shortage of ground water, overuse of chemicals etc.) the world is perfectly capable of satisfying the natural desires of 10 billion people for food and shelter with today’s technology.

However, it is important to understand that most climate scenarios carried out by financial institutions and corporations are faulty simply because they disregard the likelihood of emergence of new “needs” that require greater energy and emissions such as same-day delivery of online purchases or more lanes on highways for peak hour traffic.

The question is whether we choose to abandon the scarcity myth and redesign our economic performance indicators to measure what matters: how well the society satisfies the necessary and natural requirements of the world’s population for food and shelter? Isn’t everything else an optional extra that can be thought about once this primary goal is accomplished?

Or we insist on prioritizing technologies such as Bitcoin; it consumes160 TWh (Poland’s annual energy consumption) for solving abstract mathematical problems for no particular reason enabling payments for organized crime, terrorism and drug trafficking, with a CO2 footprint of 1600km car journey per single transaction?

What is the biggest selling point of Bitcoin? An artificially and intentionally manufactured scarcity designed to mathematical perfection!

-WH

Tourbillon: the Engineering Marvel

Breguet defeated gravity in 1801. A little more than a hundred years before Wright brothers took to the sky, one of the greatest horologists of the time, Abraham-Louis Breguet, received a patent for his design of a tourbillon – a device to cancel the effects of gravity on the precision of a mechanical watch. Till today the same precision mechanism is highly prised in high-end mechanical watches. This same device also serves as an interesting illustration for an insane resource allocation in our economy.

A mechanical watch keeps time using a balance wheel similar to a pendulum of a clock. The wheel rotates back and forth, and at each extreme moves the gear train forward by one step, making the familiar tick-tock sound. Precise time keeping is a challenge though. If one side of the balance wheel is higher than the other, the movement will not be uniform – gravity will impact the result. In a stroke of engineering genius, Breguet placed the whole mechanism of the wheel in a rotating “whirlpool”, which cancelled most of the effects of the gravity.

Tourbillon was and remains an extremely complex piece of mechanical engineering. In the nineteenth century it cut the daily measurement error of pocket watches from 10-20 seconds to 5-10 seconds! Its production is no small feat, with over 50 tiny pieces and days if not months of fine tuning to make sure that the positive effects outweigh the potential errors introduced by the new rotational movement.

Tourbillon: the Economic Puzzle

Fascinating device as it is, tourbillon’s significance as an economic puzzle is even more noteworthy. A cursory browsing of today’s online stores of haute horlogerie reveals a good representation of modern tourbillon watches. Since this is a special feature that takes many man hours to get right, it is expected that these watches command a premium.

Except of course, and here is the snag, tourbillon’s relevance as a time keeping technology disappeared entirely the moment the first noble gentleman realised that keeping a watch on the wrist is much more convenient than reaching out for the waist pocket. That’s right, since wrist watches are regularly positioned horizontally, tourbillons have absolutely no measurable effect on the precision of a wrist mechanical watch!

All of this, of course, in turn became completely irrelevant after Seiko gifted the world its first quartz watch in 1969. The best quartz watches today achieve precision of +/- 5 seconds a year, while the most exceptional mechanical watches can show a minimum deviation of 1 second a day in controlled conditions, i.e. 70 times worse than quartz! That’s right: your average $50 battery-operated watch is more precise than a $100,000 mechanical masterpiece!

Now for the big question:

why would consumers pay for artisans in Switzerland, Germany or Japan – three of the most expensive countries in the world to spend an average of 834 hours to hand make an inherently outdated piece of equipment with a component that is entirely devoid of any meaning for over a hundred years?

Exercise in futility?

Prestige and signalling is certainly one explanation: wearing such a device shows the world that one belongs to an exclusive tribe and the value of the piece can signal one’s “plumage”. But some individuals with very evident plumage and in no need of signalling it (see below) still prefer to wear these watches. Art is another explanation, but there are thousands if not millions of aesthetically pleasing works of art that people do not wear and do not buy.

If you engage the enthusiasts in a conversation, sooner or later you will hear phrases like “hand-made”, “craftsmanship”, “intricacy”. A connoisseur of tailor made cloths, bags or custom classic car coaches will tell you that the tiny imperfections found in stitching, soldering or riveting are the reason for the price – the evidence that the piece was hand-made.

The true value lies on their wrist in the form of evidence of 834 average hours of futile, meaningless and back bending work producing a device which could be replaced with a glance at any screen in the vicinity. It is the membership card of the “owners’ club”. Not the owners of watches, but the owners and rulers of other people’s meaningless work. The essence of this attraction is our long-standing fetish of labour – an obsession with toil as a measure of value. The problem is, as we get more and more productive at making things, the number of hours spent on making things become disconnected with the real value added to us.

Business Insider has a YouTube series “Why so expensive” – a collection of videos covering similar items: from lotus silk to Japanese knives, real wasabi and Olympic curling stones. All of the items covered in the series have two things in common: 1) they are produced by hand usually in an extremely difficult environments and involving heavy back-bending work and 2) they have extremely cheap, efficient and mostly superior alternatives. The world of haute horlogerie is not the only ticket to the owners’ club of futile labour.

Back to resource allocation: isn’t there a better way?

The question this raises is whether our common belief that markets allocate resources efficiently and where they are needed is valid, or is still valid? Surely, if the society spends significant resources on things that have no useful meaning, it is sensible to ask whether some alternative uses of these resources are more exigent? The question here is not whether one is justified in wanting to have a piece of art or an artisan object. Rather, whether the social system has the correct priorities: are there needs that most people would consider more important?

Take for instance the number of children classified as “at very low food security” in the United States – the largest economy in the world with the most powerful military in the history of human kind. According to the US Department of Agriculture, there were 841,000 such children – meaning they regularly went hungry. We can’t blame them for being lazy and not pulling their own weight, even if some may make such an argument with respect to their parents. Could we make a dispassionate argument that no matter what system, on the whole, it would make sense to feed these children first, before placing a tourbillon in a mechanical watch?

According to a study carried out by SJX, the very rarefied top of haute horlogerie consists of about 15 brands producing no more than 500 watches a year. This is not the Rolex or Omega group. Wearers of these watches look at Rolex like a Michelin star restaurant patron at a McDonald’s Drive-in sign.

According to the same source, it takes a maximum of 834 hours per watch built in this group (vs. 2-3 hours for a Rolex) and these watches retail at an average of $100,000. Assuming that providing a single child in the US with a basic nutrition would cost $500 a month, a quick math suggests that if 500 gentlemen (almost exclusively) decided to collectively use less menial work and switch to Rolexes or perhaps satisfying their chronometric curiosity by glancing at the screen of one of their devices, 8333 children would be fed. Which is not bad, but you could make an argument that the impact of this resource misallocation is minimal, at only 1% improvement of a chronic problem.

Switching from money to hours

But the real problem is bigger. An assumption here made is that our enthusiasts of mechanical time measurement switch to Rolexes and “pay” for children’s food. Strictly speaking, this does not change the resource allocation, since the watch makers would still make the 500 brilliantly flawed time pieces that would be sold to another set of time lords of excess.

The way to re-allocate the resources would be to switch the watch-making hours to making food, i.e. going from the currency world to the time world (hours spent) – no pun intended. Five hundred watches on average requiring 834 hours of work each means 417,000 hours of work a year.

Amusing as it would be to see a bunch of Swiss watch makers transported to a farm in rural Iowa to grow food, that is not the point of this exercise. The market allocation of resources has “spent” the 417,000 working hours on building devices that serve no real purpose. The question is, what would be the impact of an alternative allocation?

We need to understand how many hours of labour are needed to feed one person for one year. Luckily, an article published in the Resources journal by a team of nutrition experts: María José Ibarrola-Rivas, Thomas Kastner and Sanderine Nonhebel answer exactly this question.

In a mechanised system of food production, it takes only about 1.8-1.9 hours of work per year to feed a single grown adult. Assuming a child requires a little less nutrition, a ballpark number could be 1.5 hours per year. If by some magical and amusing circumstance the Swiss watch makers spent their collective 417,000 hours on food production, they would feed 278,000 children, or more than a third of all children in the US going hungry! As a reminder, we are not talking about the whole world mechanical watch industry, not the higher end of it, but a tiny proportion of the highest customised end of the high end that makes 500 watches annually.

Where does this difference come from? In monetary terms, the switch would make an impact on 8333 lives, while in real hourly terms the impact would be 33 times higher – 278,000 lives!

If the reader still doubts this premise, a good exercise would be to imagine the best watch in mind worth USD 100,000 that was made in an entirely automated fashion on an assembly line, without manual labour. Does it still feel expensive?

The system has pushed work to lower productive areas and industries because it found no real need to feed the hungry children. This is not a bug but a feature in our system: since 1990s in the USA every 20 years 15% of all hours worked shift to the equivalent of making mechanical watches – futile labour meant to meet very non-essential requirements.

Let’s not be naïve. Of course, a larger part of the cost of food in the US is processing, transportation, distribution and food waste, so just by wasting less food, or shrinking the margins of the layers of beneficiaries in the supply chain by 0.01% all of this problem would have disappeared entirely. The demonstration in this case is just to highlight the scales of resource allocation inefficiencies.

Although feeding the malnourished children is an example, another allocation outcome is more thought provoking. What would happen to the society as a whole if instead of moving the Swiss watch makers to the rural Iowa, we left them alone where they are, paid the same wages but did not require any work from them? All their daily needs and requirements would be met as they are now. The only missing part would be the complex time pieces. A fair question to ask is: isn’t the society steeling the time of these individuals? How much time is “stolen” in similar industries?

What about the people who will “lose out” from reallocation?

So far the argument for reallocating resources was made entirely from the viewpoint of the recipients of reallocation – the children. But what about the effect on the society at large and the horological heroes in particular: after all, their legitimate need for a specific product can no longer be met. Is there a conceivable negative or as the case may be – a positive effect in this lost consumption?

Paradoxically, making these 500 watches a year disappear in a smoke of mental exercise might actually make the very people who buy them happier. At least to an extent. But a small detour is required to elaborate on what “happiness” means in this context.

The term “happiness” was censured out of Economics texts since the early twentieth century, then reintroduced in the last two decades directly borrowing from a rich idle slave owner from Greece – Aristotle (more on this in another post). His thinking on the subject can be summarized by one word: work. Of course work in his understanding included only reading and writing philosophy texts, while doing useful things like baking bread and making garments was relegated to slaves, who in his opinion were incapable of experiencing happiness (a slight and very ironic misunderstanding of ancient texts by Calvinists, I fear).

The pleasure of owning and enjoying things had nothing to do with happiness in Aristotle’s view. Following this thinking, luxury watch owners could become happier by earning less money and spending the saved time on the study of philosophy. This argument ought to be tested in the galleries of Harrods of London: printed full works of Aristotle instead of the $700 Tom Ford leather belt will make you much happier! Utter nonsense.

But when it comes to the pleasure of any experience, including owning and enjoying things, another Greek philosopher’s views are more relevant – those of Epicurus. These views are nuanced though. Buying an expensive watch is pleasurable and as such, makes one happy. On the other hand, in the words of the philosopher himself (translated from ancient Greek with a huge risk of misinterpretation): “wherever a desire requires intense effort to fulfil, such pleasure is due to idle imagination, and it is not owing to their own nature that they fail to be dispelled, but owing to the empty imaginings of the man.”

The point Epicurus is making, is that having an exclusive watch could be pleasurable, except when there is too much effort involved in getting it or too much fear of not being able to buy it in the future. Although Epicurus wholeheartedly accepts the benefits of pleasure from using luxury items, he warns about the danger of pursuing luxury consumption as a way of achieving a certain status (“safety from other men”). Such a status, in his opinion, is better achieved by having a group of reliable friends. So even the most hedonistic of the ancient philosophers would concede that skipping on a $100,000 watch should not reduce one’s happiness.

Ancient history. What about the modern days? Surely things may have changed since the 4th century BC? Not that much. In a study by T. Kashdan and W. Breen of George Mason University we find that “…people with stronger materialistic values reported more negative emotions and less relatedness, autonomy, gratitude and meaning in life”. Rik Pieters at Tilburg University reports the vicious circles of materialism and loneliness: loneliness pushes towards luxury consumption which in turn reinforces loneliness. As it turns out (surprise, surprise) wearing and exhibiting luxury items makes people measurably less likeable – not exactly a great way to start a friendship.

And now for the question

The balance of evidence then from the ancient philosophers to the modern day sociological studies is that the very people who would miss out on buying the luxury watches would be better off not having them!

So here is the big question:

How can we collectively insist that the current economic system is good at allocating resources, if we have such a glaring example of an insane outcome in which instead of feeding 278,000 children, we make 500 pieces of ornamental nonsense that suck at telling time, making everyone unhappier, including those who buy them and those who make them?

One could argue that we have no business discussing this subject, since we have a free society where everyone is free to work, earn money and spend on any product they desire and that is available for sale. Having the opportunity and the right to buy those watches is the ultimate expression of freedom.

But wait… the same “freedom” argument could be used to justify purchasing illegal drugs, services of a murderer, the Big Ben in London or a complete human being (I take that away, we collectively developed a dislike of the latter only in the past 100 years and not everywhere). So the society draws lines somewhere to define the “rules of the game”. Surely the lines can be redrawn better to avoid outcomes such as this one?

The invisible hand of Adam Smith is at least a little wonky if not detached from a body with a head and eyes. Poor, unfair or inefficient resource allocation is also the smallest of the sins of this economic system, which is directly threatened by this fault. The speed of decline is baked in (the irony that this has been said before at least for a hundred years does not escape the author, but more on this in other posts) and defined by the pace of the technological progress. This failure is brought about and reinforced by other failures that are creating an existential threat to the system: are the resources really scarce? (question 2) and is utility maximization really something we need to do?(question 3).

-WH

Question 1: Resource Allocation

Is our system as good as we thought at allocating resources? The case of futile labour, five hundred watches and children that go hungry.

Question 2: The Scarcity Myth

If scarcity is a real economic problem, why then most business founders find selling products and services the hardest thing to do? How did the world remain well fed and well clothed in Covid times with nearly 20% of population in the West out of work?

Question 3: Utility Maximization

Is utilitity maximization really a valid target for a social goal? Do people really prefer more utility to less ad infinitum? What if at a certain point “utility” from consumption is redundant? What if that point was reached say 30 years ago?

Question 4: The Measurement

Gross Domestic Product (GDP) as the main measurement of economic success has been extensively criticized, but still dominates economic policy goal setting due to lack of any reliable alternative. Happiness related indexes are thought of as alternatives, but they are inconsistent and unreliable by design. Is “Happiness” a red herring designed to demonstrate that there are no alternatives to GDP?

Question 5: Distribution

What happens if (or when?) AI, robotics and other technologies eventually result in negligible costs of production of goods and services? We currently distribute goods and services on the basis of the value of contribution/work. If no work is required, how do we decide who gets what?

Question 6: Purpose

What is the end goal of economic policies? If happiness is the end goal, as currently “speculated”, how do we measure something that is inherently subjective?

Question 7: Time

Make an experiment: ask a group of mature people about what they would really like to have more than anything else. Chances are, you will end up with time as the main desire: time to spend with loved ones, friends, hobbies, learning, creating. What does Economics tell us about time? How good are the modern economies at giving us this one true scarce resource?

Subscribe now