2a: Economic Perils
Man 1 makes and sells tool A - a flint axe - to an increasing number of regular customers, with tool price set at tool value, Pa = Va. He does not himself use tool A.
Assume in case F that tool value Va = 10, tool cost of production Ca = 2, and tool lifetime La = 100. These variables are all denominated in days.
In the case where there is one buyer, man 2:
When a second buyer, man 3, appears the exchanges become:
The idleness of man 2 and 3 does not increase by buying and using tool A, because price is set at tool value. However man 1's idleness rises by 0.08 or 8% with each customer he gains.
Since there is no benefit to any buyer from buying these tools, it may be asked why they bother. The price represents an extreme. The buyers do not gain, but neither do they lose, and it makes no difference whether they buy or don't buy.
If man 1's initial idleness was 10%, then he would initially have been spending 90% of his time performing whatever work was needed to maintain himself. So when his first customer, man 2, started buying tool A from him, man 2 would have paid for it by performing work for him equal to 10% of a day. Man 1 would now be 20% idle, but would have to spend 2% of his time making the next tool to sell, and so would be 18% idle.
When man 1 gained a second customer, the two customers would each pay for their tools by performing work for man 1. Man 1's idleness would now rise from its initial 10% to 30%. But he would now have to spend 4% of his time making 2 tools to sell to his 2 customers, so that his idleness would now be 30% - 4% or 26%.
And so it would continue. When man 1 has 9 customers regularly buying tool A from him, with each relieving him of work that occupies 10% of his time, they will relieve him of all the work that he had initially been performing every day before he started selling tool A.
However, since it takes him 2% of his time to make a new tool, then when he has 9 tools to make, he is busy making tools 18% of his time. So, at the end of the day, he is 82% idle. He performs none of the self-maintenance work he was initially performing, because this is all dome for him by his customers, and the only work he now does is tool production work.
With 9 customers:
If he now takes on a 10th customer, the only work that this customer can perform for him is his tool production work, since all other work is being carried out by the other customers. Since he is making flint axes, he may require the 10th customer to collect flints for him, and wood for the handles, and fibrous plants to bind the flint blade to the handle, leaving it to him to knap the flints to form the blade. If half the time spent making flint axes goes into collecting the flints and wood and fibre, then the 10th customer will will increase his idleness to 90%. Each day man 1 will spend 10% of his time preparing flints.
And if he now employs his 11th customer to prepare flints for the axes, he becomes 98% idle. His sole remaining task will be to fit the blades into the handles, and bind them securely in place.
Purchasing Necessities with Luxuries
If man 1 is now to gain a 12th customer, there is next to no necessary work for this customer to perform on behalf of man 1. The real idleness of man 1 cannot be much increased above 98%. If the 12th man is to become a customer, he will have to perform unnecessary work.
The 12th customer, and subsequent customers, may be set to work enlarging man 1's house, and fashioning an ornamental garden around it, and a lake with a fountain in it, for man 1 to enjoy during the 98% of his time that he is idle. The enlarged house and the garden and the lake and fountain are not useful tools. They are simply things that people can enjoy in their idle time. They are luxuries.
If man 1 is prepared to purchase such luxuries, then he can have any number of customers. The first 11 customers will relieve him of almost all his work, and subsequent customers will supply him with every manner of luxury and amusement. For if idle time is all that he desires, or he disapproves of luxuries, then he will not accept more than 11 customers. A love of luxury allows him to expand his business, and to sell his useful tool to many people.
(It might be pointed out here that man 1 may not be much interested in an idle existence, and may instead prefer luxuries and amusements to augment his busy life. Quite so. That is his choice. It makes no difference to the argument.)
(It might also be pointed out that if men are to make and sell luxuries, these luxuries ought to have their own cost and value and price. But in this case man 1 is simply employing men to do whatever he tells them to do. This might be to sweep his house, or cook his lunch. But it may also be to paint murals on his walls, or chisel stones into sculptures. He is not buying murals or sculptures, but buying labour. If, having learned how to create stone sculptures during his apprenticeship under man 1, one man sets himself up as a sculptor, he will then consider carefully the cost and value of his individual sculptures, and assign a price to them which is greater than the cost, and thereafter sell sculptures rather than his own skilled labour.)
The Dragon Economy
The foregoing account of the expansion of a small manufacturing business shows in outline how idleness-increasing necessities may come to be purchased with idleness-consuming luxuries, and how a secondary luxury-producing economy may thereby be forced into existence. In this example, the flint axe maker is a monopoly producer who charges the highest possible price for his tool, and fairly rapidly he can only be paid with luxuries.
But another feature of this system is that, even though a useful tool is being produced and sold in quantity, the real idleness of the economy barely rises at all. In the first place, because the tool is being sold with price equal to value, buyers gain no increase in idleness from its use. The only person whose idleness rises is the flint axe maker, and his idleness rapidly rises to near complete idleness, after which it can rise no higher. Almost all the gains in idleness from the use of his flint axes have been converted into luxuries in the form of a large house, and ornamental garden and lake and fountain.
In this sort of 'dragon' economy, the appearance of high-priced new tools does not result in any real increase in real idleness - idleness as actually experienced. The increased idle time is almost all being used to make luxuries, and everyone is as busy as they were at the outset. In this kind of economy, there is no increase in idleness and freedom of choice, but only an increase in the number of material luxuries - houses, gardens, fountains -. It becomes a self-defeating economic system, working against itself, and locked in toil.
If, by comparison, the flint axe maker sold his axes at cost, there would be a quite different outcome.
In this opposite circumstance, the buyers receive the entire value of the tool, and the seller receives none of it. The idleness of each tool buyer rises from 10% to 18%, and the idleness of the seller remains unchanged. And so in this case as the number of customers rises, their mean idleness also rises. The idleness of the entire society rises by 8% as more customers buy the useful new flint axe. And this is an increase in real idleness. No luxuries are exchanged for necessities. But where the price is set at tool value, the real idleness of the society hardly rises at all, and nominal increases in idleness appear in the form of luxuries
The first manufacturer of a new tool is always a monopolist, if only because nobody else is selling the new tool. And he is always likely to sell the new tool at the highest price he can command. But in the normal course of events, attracted by the profits to be made, competitors are likely to rapidly appear. And the effect of this competition will be to drive down prices towards costs. And pricing tools at their costs results, as has been seen, in an approximate social equality. Pricing goods at their values, as is likely to happen with new tools, will result in inequality. And this inequality will often be accompanied by the appearance of luxuries.
And if there are lots of new tools regularly making their appearance, as is likely to happen in times of strong economic growth, it is also likely that inequalities will also appear, as monopolist manufacturers ask the highest prices, or potential buyers bid up the prices. And with these high prices, luxuries will also appear, as the monopolists convert increases of idleness into luxuries. And it will always take some period of time before competitors can step in to pull prices downwards.
The result is that economic growth is likely to be accompanied by monopolies, high prices, and the appearance of a secondary luxury economy, in which people buy necessities with luxuries. This forced secondary economy, driven by necessity, is likely to vanish shortly after economic growth stops, and competition drives down all prices to their costs. In an equilibrium economy, in which there is no growth, there will generally not be monopolies or high prices or luxuries. These are instead features of a dynamic, non-equilibrium growing economy.
It may be something that just has to be lived with. Entrepreneurs and innovators are not going to be induced to open up a new market if there are no gains to be made. What is the point of starting a business that sells, say, flint axes, if the prices are fixed at costs from the outset? It might be said of economic growth that it will always benefit a few people before it benefits everybody else, just like a rainstorm passing overhead will water some of the gardens below before it waters all of them.
There is nothing wrong with luxuries and amusements in themselves. The problem seems to arise when luxuries are traded for necessities. The flagship example of this is prostitution, in which food and shelter are bought with sex. In an equilibrium economy, there are likely to be many luxuries manufactured and traded. But people would make them out of choice, rather than out of necessity.
Consumer societies, which sell numerous luxuries, are largely a consequence of inequalities which appear during periods of economic growth. These inequalities appear in the form of an excess of money in one section of society, and a deficit of money to buy necessities in another section of society. The excess cancels the deficit when cash-rich people buy luxuries from cash-poor people. When, eventually, economic growth slows and stops, competition drives down the price of goods, and produces a social equality in which nobody is either cash-rich or cash-poor. And this largely removes any incentive to make and sell luxuries. But people are perfectly able to do so, and so there will remain a trade in luxuries of one sort or another. But it will most likely not be as intensive a trade as in times of social inequality.
Author: Chris Davis
First created: July 2009
Last edited: Feb 2010