DRAFT: SUBSCRIBERS ONLY: Þe Ideal-Type of a "Commodity Economy"

Thinking aloud...

The 2020-2022 COVID-19 plague caused by the coronavirus SARS-COVID-19 has, many today think, put the world economy in an odd position. For more than a quarter century now the ongoing revolution in data processing and data communications technology has been profoundly altering the basic underpinnings of property and exchange and value—has been shifting us from a “commodity” to an “attention” economy. We have all watched this shift gradually lurch forward. But now, many say, our two plague years are packing, in some aspects, what would have been at least a decade of change and development into two years, as requirements of quarantine and social distancing have taught and humans have had to learn on an emergency basis how to better use information and communications technology to try to substitute for much face-to-face interaction.

But what exactly, are we moving away from?

Let me attempt to set out the ideal type of a commodity economy—more-or-less as Adam Smith two and a half centuries ago understood it.

In a commodity economy, in my image of it at least, things of value are concrete easily assayable commodities created for and then distributed via sale in competitive markets. The commodities are rival, excludible, transparent, and as for coordination, market prices creating incentives directing small-scale producers are enough to solve coordination problems. In fact, the properly tuned market economy solves all the problems:

Because in a commodity economy the principal sources of value are rival goods, requiring people to pay prices for using them is a very good way to incentive-compatibly crowdsource the solution to the problem of how what is produced is going to be distributed:

[willingness to pay] = [intensity of demand] x [social power (mediated through their wealth) of the demander].

That use of goods is also easily excludible makes it possible to implement such a price and market exchange-based system. Then, in addition, it immediately drops out that you have solve the problem of what should be produced: whatever makes a profit should be produced. And as long as you are comfortable with the distribution among people of social power implicit in the distribution of wealth, and as long as Pigouvian externalities are not widespread—and you can at least argue in favor of the powerful insights of Ronald Coase (or is it a dodge?) that it is possible to “cut property rights at the joints”, so to speak, to all but eliminate transaction costs and so make externalities truly de minimis—property, contract, and the market are what you need. What then is not to like?

Well, there may be information problems—adverse selection and moral hazard. Well, there is the question of whether the market and its prices are a thick enough communication channel to actually do the coordination of human activity required to make production efficient. Well, there is the question of who is going to do the R&D, and what is the right amount of R&D to do. Well, there is the question of market power.

Of these the last, the problem of market power, was well-known to Adam Smith’s generation. It was a major wellspring of his belief that only landlords should have the vote. The working class—even if a well-functioning commercial society made it prosperous and comfortable, and even if the government took a hand to moderate the stultifying effects of the division of labor on the minds of the working class, and make no mistake: Smith thought a sophisticated division of labor was both marvelously productive and appallingly stultifying—could not handle the required cognitive load of voting. And the mercantile and manufacturing classes would, if given the vote, use it to have the government give them all monopolies. But landlords, Smith thought, had an interest both in general prosperity and in competitive markets.

Of these the next to last, the problem of R&D, was always an embarrassment.

At the start it was a minor embarrassment. Suppose that we are willing to make the brave guess that the efficiency-of-labor E in a Solow growth model is equal to the value of the stock of useful ideas discovered, developed, and deployed in the world economy H times the square-root of natural resources per worker R/L.

Then in Adam Smith’s age, from 1500 to 1770, worldwide, the proportional rate of growth h of the value of the deployed-ideas stock H was 0.15%/year: less than 5% per generation; only 16% per decade. Adam Smith saw a world in which the density and sophistication of your commercial network and thus the fineness of your societal division of labor was much more important as a determinant of the efficiency-of-labor than was the process of invention, innovation, development, and deployment. Indeed, he thought of those largely as immediate consequences of a fine division of labor, rather than as an independent force.

It was soon thereafter clear that that judgment was wrong for the future humanity was then moving into. Over 1770-1870 our h becomes 0.45%/year, worldwide. And starting in 1870 it has been approximately 2%: 4.5 times its pace during the 1770-1870 Industrial Revolution century, 14 times its pace during the 1500-1770 Imperial-Commercial Revolution era, (and 55 times its pace during the preceding 1-1500 Late Agrarian Age). By the 1840s Friedrich Engels was dismissing classical economists as obvious paid shills for the rich because of their reduction of:

the production costs of a commodity... [to] three elements: the rent... the capital with its profit, and the wages…. A factor which the economist does not think about–I mean the mental element of invention, of thought…. What has the economist to do with inventiveness? Have not all inventions fallen into his lap without any effort on his part? Has one of them cost him anything? Why then should he bother about them in the calculation of production costs? Land, capital and labour are for him the conditions of wealth, and he requires nothing else. Science is no concern of his. What does it matter to him that he has received its gifts through Berthollet, Davy, Liebig, Watt, Cartwright, etc.–gifts which have benefited him and his production immeasurably?… In a rational order which has gone beyond the division of interests as it is found with the economist, the mental element certainly belongs among the elements of production and will find its place, too, in economics among the costs of production…. A single achievement of science like James Watt’s steam-engine has brought in more for the world in the first fifty years of its existence than the world has spent on the promotion of science since the beginning of time...

As I say, it was an embarrassment—subsumed under Pivouvian externalities or discussed as requiring a tradeoff between static and dynamic efficiency via patent systems making legally excludible what was non-rival in is essence. It was a sign that Smith’s mental image of what was typical for a “commodity economy” was not describing reality, and was describing it less well as time passed.

How about information problems? They do not arise—much—in a commodity economy because you are buying and selling concrete, visible, assayable things. Neither moral hazard nor adverse selection has much play.

And problems of coordination? The image of production in a commodity economy is of a small farmer, or a small craftsman, or the work of a small team. And, where necessary, the Coasian insight—or, again, is it a dodge?—that Darwinian processes would let firms grow in size as long as their internal processes were more efficient than market coordination would have been, but then firm growth would stop, and to inquire into the workings of firms was somebody else’s business.

That is the mental image of what is typical for a commodity economy—the Weberian ideal-type. It is, of course, only an ideal-type. It was never an actual empirical reality. But it was close enough in Adam Smith’s day to guide a great deal of useful thought about economy and economic policy.

1428 words

---

---

(Remember: You can subscribe to this… weblog-like newsletter… here: 

There’s a free email list. There’s a paid-subscription list with (at the moment, only a few) extras too.)