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The economic foundations of abundance

An approach to the concept of abundance and the elements that make it more possible and closer today than ever before in the history of our species.

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pais de la abundancia
We all understand that abundance exists when it becomes unnecessary to work out what is produced and what not, and above all, how much access to a given product these or those people will have.

Schlaraffenland - JaujaThat’s why it’s intuitive to understand that abundance is a question of costs. We all understand that if producing something doesn’t cost anything, that something will be abundant. The problem is that it’s hard to think of anything whose production doesn’t cost anything, and even harder to picture a society where it never costs anything to produce anything.

The truth is that a situation like this is not necessary to imagine a society of abundance. We just need to distinguish between value and price on the one hand, and the other, between the different types of costs of production.

Value, price and costs

As we saw in the prior essay, as a species, we humans are obliged to transform Nature to survive. In that transformation, “things” incorporate knowledge and are “humanized” as they are turned into products. This incorporation is none other than the effect of the the transformation itself, the effect of work. That’s what we call value.

Value and price

Schlaraffenland - Jauja 3Value is not price. Price is a measure that attempts to quantify the relationship between different resources within general scarcity. Value, in contrast, is the measure of work, and therefore, of the knowledge “incorporated” into an object or a service.

The difference between value and price is a classic piece of economic theory. The first economists of the 17th and 18th centuries, “the classics,” embraced theories of labor-value and built their models around the differences between “incorporated work” and relative prices over the long term. At the end of the nineteenth century, when the corpus of marginalist economic theory was formed, the economic foundation (value) was left out in favor of an effective explanation of the mechanism of prices. A good understanding of the mechanism of prices and the efficient distribution of scarce resources needed no more than a good understanding of the relationship between supply and demand, which is to say the relative measure of scarcity among resources.

In reality, every object or service, to the extent that is necessarily a product, and to the extent that it always incorporates human labor, has value, but only goods, the scarce products that enter the market, have a price.

When something becomes abundant it stops having a price, or rather, has a price of zero. A handy example is free software. It obviously has value: it incorporates knowledge and serves in turn to produce other goods and services. It also has costs: the work hours that thousands of developers have dedicated to coding and the computers they used, the maintenance of the servers from which each program is distributed, etc. And yet, its price is zero. Why? How can it be that something with costs has a price of zero, even when it has established demand and there would be certainly be people prepared to pay for access to it? Is it just a donation?

Price and costs

To answer, we must first understand what costs consist of. Intuitively, when we think about them, we think about the total cost: how much it costs me to produce a given number of copies of something. In reality, this cost has one fixed part–what I have to spend no matter what to start producing–and a variable part, which is a function of the amount produced.

costes variablesFor example, if I want to make sugar, my fixed cost will be (simplifying somewhat) the cost of the sugar-milling machines, while the variable costs will be the sum of the costs of the work hours that I dedicate, the tons of beets I purchase, and the electricity consumed by the machines. The fixed cost, the cost of the sugar-making machine, does not depend on the amount I choose to produce. However, the variable costs will tend to grow as I produce more. Intuitively, we understand that the average cost, the result of dividing the total costs by the amount produced, at least at first, will tend to decrease because by producing more, and the part of the fixed cost built into each cup of sugar will be smaller. As of a certain quantity, however, I would begin to find myself obeying the famous “law of diminishing returns,” and costs would vary (three people working on the machine do not produce three times more than the first, but rather, a bit less).

costes marginalesBut there is still one more measure of cost, which is especially interesting: marginal cost, the extra cost incurred to produce the next unit of product. Mathematically, it is the derivative of the function of total costs, but the interesting part comes from being useful to determine how much a business will produce in a market in perfect competition.

Perfect competition is a model that all Econ students learn in their first year. In it, all the businesses in an industry produce identical goods, there are no barriers to new businesses entering the market or old ones exiting. No business has any trouble acquiring new technologies and no business has the power to set prices on its own. In other words, by definition, none of the participants enjoys rents&madsh;benefits due to some type of differentiation or extra-market advantage.

In reality, in a model like this, the price is set by the business that is capable of producing at the lowest cost, and the others adjust their production to that competitive price, which in the end, is simply the one that reduces extraordinary benefits—rents—to zero. In this model, the supply curve of the businesses is built by thinking about how much different businesses would like produce for a given price.

producción competencia perfectaThe answer would seem to be common sense: as the price is equal to the income that the last unit sold would produce, they would not want produce if the marginal cost was greater than the price, because then that last unit would cost more than the income it would create and would reduce the total benefit. But if the marginal cost was less than the price, producing a little more could still bring in a little more and give a greater total benefit. Result: a business will be situated with maximum total benefits when the amount produced equals marginal cost and price.

And thus, one of the mantras of every economist is born: in perfect competition, which is to say, when rents don’t exist, the price is the marginal cost.

Abundance as child of the market

Schlaraffenland - Jauja 2By introducing time into this model, Econ students learn that predictably, over the long term, in every industry, the curves shift to the right, which is to say, that prices fall over time. But let’s imagine that a series of technologies or forms of production appear that pull the curve of marginal costs down, so that, over the long term, we could think about marginal costs equal to zero.

If we think about it a bit, that’s already happened with some immaterial goods: up to a certain amount, one more person downloading one of our books from our server does not mean any extra cost. The marginal cost of distributing a book in the public domain is zero. And what goes for a book goes for a copy of the latest distribution of Debian.

In markets like free software, therefore, we can talk about having arrived at the paradigm of perfect competition: Zero marginal cost and zero price. The product has reached a point where the efficient price is the zero price. No longer is it exchanged for money, no longer is it a commodity: decommodification has arrived as a product of the evolution of the market.

Criticism and nuances

Distributed networks and abundance

Topologías_de_redThe first criticism of the example above would be that it’s only true for a certain number of copies, because if our server passed a certain critical point, we would have to increase bandwidth and in reality, if it happened long term, we would have a growing variable cost and therefore, a positive marginal cost.

But this is really only true if there is only one server from which to download the product. If we share it on a P2P network, like those created with the BitTorrent protocol, we would be in a radically different scenario: each new download, each new user, would mean a another possible place to download from for the next person. The more people who “consume,” the less each one of those who already are part of the network need to contribute. Not only we would we be well settled with the zero marginal cost, but at the limits, the total cost borne by each person would also be zero.

This is just one example of the logic of abundance produced by distributed networks described by Juan Urrutia in 2001. In addition to the network effects like the one described above, there’s one more important element: the drastic reduction of transaction costs that appears when the real social network unites identarian communities.

bittorrentTransaction costs is another concept from economic theory. They were created to explain why, if markets tend toward efficiency, people don’t just start produce things on their own, hiring the factors of production and even the coordination of the process ad hoc. That is, transaction costs are the primary explanation for the existence of businesses. They include things like the cost of negotiating with providers and customers, the derivatives of the need to get information and those of supervising providers and customers. All of them have to do with asymmetries of information and distrust between people, and it is that distrust that makes it rational to set up a business, which is to say an institution, a set of contracts, that is going to remain stable over time.

But all these costs dissipate within a real community–which is, by definition, a small distributed network–of people based on trust. Unity in large distributed networks of overlapping identarian communities–which is to say that on average, each individual will have more than one identity-based community–is both about the role of models and the reality made much more possible by the Internet, the “primordial soup” where abundance germinates for the first time, even if only in a few environments, on a massive scale.

Other rents

El capitalismo que vieneAnother obvious criticism would remind us that, “in real life,” big businesses do not live in markets with perfect competition, but seek rents of all kinds: rents of position, regulatory rents…

But here once again, the emergence of distributed architectures changes the game. The key is a concept described for the first time in another book by Juan Urrutia: the dissipation of rents. The idea is that the unity of distributed networks and globalization erodes all rents more and more intensely, including regulatory rents like intellectual property.

To understand the ultimate causes, we must add one more factor: the reduction of the optimal scales of production, which is result of technological development. The same movement background that produces a true crisis of scale means that necessary investments are smaller smaller, and it takes less time to replicate an innovation in any industry, including some as complex as pharmaceuticals. That’s why even rents from innovation, the benefit derived from create something new and enjoy a small, temporary monopoly, are more and more brief.

Of course, that doesn’t mean that rents derived from things like the legislation of intellectual property or “custom” regulations for oligopolies like electricity have disappeared or been canceled. It just means that, for the time being, they are being continuously eroded, in an unending cycle of innovations that erode rents and legal repression, new innovations that have already brought down audiovisual industries, publishers, and even energy production, and that, over the long term, seem to reinforce the expansion of technologies and networks that are more and more distributed and opaque to the State.

The fibers of abundance

mosaico abundanciaThe fibers of a society of abundance are already among us. Some, like the dizzying development of productivity or the possibility of zero marginal costs, were already present in the thought of the utopians and economists of the 19th century. Others, like the role of the reduction of scales, distributed networks, and the commons, only have appeared clearly in the last three decades.

Those very elements let us clearly see something that is no less important: what doesn’t lead to abundance, what is truly “reactionary” in our days. We’re talking about strategies like the recentralization of the Internet, and about economic nationalism and the expansion of corporate rents that it entails, which are typically accompanied by the exaltation of over-scaled financial markets, and therefore necessarily destructive. But we’re also talking about narratives that present growth, technological development, and productivity as enemies to beat.

In upcoming essays in this series, we’ll go into more depth on the new basis of abundance, to start them to imagine the possible world that they are drawing for us.

Translated by Steve Herrick from the original (in Spanish)

«The economic foundations of abundance» recibió 2 desde que se publicó el Lunes 8 de Junio de 2015 dentro de la serie «» . Si te ha gustado este post quizá te gusten otros posts escritos por David de Ugarte.

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    The economic foundations of abundance An approach to the concept of abundance and the elements that make it more possible and closer today than ever before in the history of our species.

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