Wednesday, October 28, 2009

Infinite wants are not possible

I hope in the following post to show infinite wants are impossible. Humans can be satisfied with what they have, at least to a degree sufficient to upend economic theory. Without infinite wants there is no scarcity of the sort economics requires, without scarcity there is no need for a medium of exchange. Infinite wants are an essential, if not the essential component of economic theory. Without it, I suspect economics collapses. My general question to people who believe infinite wants are possible is this: can you prove it?

Economics believes wants are infinite. On top of this belief comes the concept of scarcity, which is the result of the clash between those infinite wants and pesky finite resources. Believing wants are infinite, you can, for example, go on to believe increasing efficiencies leads to increasing employment; produce it more cheaply and they will buy, so to speak. A simplification I know, and yet the very idea that increasing production efficiencies lead to increasing demand for labour implies this.

So, the economy produces more and more stuff with fewer and fewer humans involved in production, but because there are infinite wants out there, this stuff is purchased, and these purchases then filter through to “increasing need for human labour.” There are two problems with this. One is wants cannot be infinite; there is only a finite amount of people on the planet, and not one of them can consume anything in infinite amounts, nor can the finite total of demand of all people on Earth be brought to bear simultaneously. Wants are, quite simply, not infinite. The second problem is highly visible in The Spirit Level (Wilkinson and Pickett), in particular in a chart showing happiness levels flattening out after an income level of roughly $40,000 annually. It seems that people can indeed have enough stuff. We don't want an infinite number of DVD players, or hifi equipment etc., and we recognise too, in that we self-report our happiness level in this way, that money can't buy you happiness, to paraphrase the Beatles. Demand is elastic, but not infinitely so. (On a side note, we tend to buy more DVD players than we might want to because they break – do they really have to break so often?) Seemingly, once a certain level of material comfort has been reached, if this is secure, all sorts of tricks must be deployed via advertising to get people to buy things. Artificial demand has to be generated to keep the economy ticking. Bush II implored Americans to shop after 9/11. This should tell us something. Why would any of this be necessary if wants were infinite?

So there are two fallacies which spring from the poor definition of scarcity which lies at the root of economics. One is this faith consumers will keep on buying and buying, certainly that they'll keep on demanding, the other is that increasing production efficiencies can only lead to increasing levels of employment.

Let's think about the second. What is the ratio here, exactly? How much does employment rise by, when efficiencies rise by say 10%? I doubt very much there can be a fixed ratio, since demand is unpredictable. A company can over-produce, or a product that was selling well can go out of fashion for any number of reasons. But there must be some basic principle discernible here, some fundamental process.

The world is an economy made up of national economies, viewing things from the point of view of money. There is some fluid number of employable people and some fluid number of consumers on the planet. If manufacturing a car once required a 50:50 human to machine ratio, but now requires a 1:10 human to machine ratio, this is true all over the world, not only in the country where the invention took place. If the 10% of human labour needed to manufacture this car in the US is outsourced to India, the ratio is maintained. Sure, more people are employed in India, but not the same as would have been employed prior to the invention. The need for less people in the production of that car is instantly a global phenomenon. Other companies not capable of the newly attained production efficiencies will suffer, and have to retool as fast as possible. Once the invention has been made, less people are needed to produce that thing globally and forever. Humans are expensive, need holidays, food, housing and sleep, and get sick. Getting rid of them in the production process makes financial sense, globally, because machines require less maintenance, generally speaking.

If increasing demand for this cheaper car means more paper work is generated, then more humans are employed in accounts or HR maybe, and perhaps more car salesmen are needed down the line. Until, that is, software can replicate much of what accountants and HR employees do, or the way we buy cars changes. This then globally too. Outsourcing does not mean a fixed amount of labour being employed where labour is cheaper. There is also the decreasing need for humans in the workplace over time, right down from extraction through to manufacture and to retail.

Each invention that replicates (mostly betters) what a human can do, takes one job type away from humans. How many new job types can we create for ourselves? Which of our abilities will remain beyond the reach of machines and AI forever? And if there are any, will they be enough to power a global economy in terms of job creation and purchasing power? And for how long can we collectively fail to notice that buying and buying stuff does not make us happy? The data showing this is there, it's just a matter of getting it noticed. Finally, when will economics recognise that demand is not infinitely elastic, that is, that wants are in fact finite?

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