January 17, 2006

No Value Here

Last night I came home from a three day trip to visit an ailing, but recovering, elderly relative. In the grocery store, restocking my empty fridge, I was listening to the muzak version of Gangsta's Paradise and figured that it was a sign of impending doom. On the other hand, I was raised believing the world was going to end any day now in the fires of divine wrath, so a persistent sense of impending doom is perhaps a deep-seated facet of my subconscious that I can no longer escape.

However, if I were to point to a better sign of impending doom for our society, I'd have to say that the lack of respect paid to activities that add nothing to the Gross Domestic Product (GDP) is a good one.

There are all manner of things that add to our societal well-being, quality of life and general betterment that generate no cash exchange. The care of parents (usually mothers) for children, is commonly cited. The care of children (usually daughters, daughters-in-law or granddaughters) for parents has become more discussed, but is also undervalued.

By care, particularly referring to the care of elderly relatives, I'd like to take the moment to point out that this can include but is not limited to: help eating, dressing, sitting, walking, standing, changing bandages, tracking medications, managing all aspects of diet and water consumption, handling paperwork, making appointments and providing transportation, sleeping in the same room to be available at all hours, helping with physical therapy and assistance with washing or using the toilet. But unless a stranger to your family is being paid to perform these tasks, they have no economic value.

This has long bothered me about economic arguments and though more economists have begun to discuss the implications of 'off-book' activities with a view towards accounting for them, I could never fully describe what bothered me about the premise they were starting from. Returning to The Essential Agrarian Reader, I ask you to consider the words of Herman E. Daly on the subject of calculating economic value:

... Economists define GDP as the sum of all value added by labor and capital in the process of production. Exactly what it is that value is being added to is a question to which little attention is given, since current approaches to valuation do not include natural resources. The gasoline price, for instance, does not factor the gasoline itself into the cost, but rather the labor and capital exended in drilling, pumping, and refining it. The value of the gasoline in situ is taken as zero.

... In our one-eyed focus on value added we economists have neglected the correlative category, " that to which value is added," namely the throughput. "Value added" by labor and capital has to be added to something, and the quality and quantity of that something is important. There is a real and important sense in which the original contribution of nature is indeed a "pie," a pre-existing, systemic totality that we all share as an inheritance. It is not an aggregation of little tarts that we each baked ourselves. ... The claim for equal access to nature's bequest is not the invidious coveting or what our neighbor produced by her own labor and abstinence.

... But there is also a flaw in our very understanding of production as a physical process. Neoclassical production functions are at least consistent with the national accountant's definition of GDP as the sum of value added by labor and capital, because they usually depict output as a function of only two inputs, labor and capital. Land, as the geophysical basis on which natural and commercial growth depends, does not appear. In other wonds, value added by labor and capital in production is added to nothing, not even valueless neutral stuff. But value cannot be added to nothing. Neither can it be added to ashes, dust, rust, and the dissipated heat energy in the oceans and atmosphere (i.e., high-entropy matter/energy). The lower the entropy of the resource (i.e., concentrated ores and mineral deposits) the more capable it is of receiving the imprint of value added by labor and capital. High entropy resists the addition of value.

... [According to the way the production function is taught in macroeconomics ...] Presumably we could produce a one hundred pound cake with only a pound of sugar, flour, eggs, etc., if only we had enough cooks stirring hard in big pans and baking in a big enough oven!

... Nothing in the production process is analogous to multiplication. What is going on is transformation, a fact that is hard to recognize if throughput is absent. R is that which is being transformed from raw material to finished product and waste (the latter systematically not listed as an output in production functions). ...

I hope Mr. Daly and his publishers will forgive my liberal quotation of his essay, but I've never seen this spelled out so clearly anywhere else before.

The purely economic perspective assigns no value to unpaid labor. It's conisdered ridiculous to assign value to the civil rights of minorities or the equal rights of women, as if the people under a social system that values them behave no differently than people who are oppressed. It assigns no value to land, to unused resources, or to cultures who don't participate in the cash economy. No value is assigned to the ability of a habitat to support human or animal life unless someone with an established stake in the cash economy can figure out how to pay the way.

In keeping with this, and further reminding us (as if we needed reminding in this day and age) that government secrecy can be turned into cover for abominations against humanity, I'd like to point my gentle readers over to an Alternet story about how the Ecuadorian government and the oil companies screwed yet another indigenous society. Alternet has the previously secret documents available to prove the full extent of this perfidy.

The Amazonian tribes whose mineral and reparation rights were signed away so carelessly don't participate fully in the cash economy, if at all. The only thing they have of value is undeveloped land that, in its undamaged state, supports all their needs to their satisfaction. The economic value of their livelihoods and ability to support themselves, to say nothing of the cultural value of preserving a place for them in the world community, has been assigned a cash value to them of a smidge over $3500 in goods and services in return for the oil and pollution control rights to their lands.

In defense of the Ecuadorian government, they are so deeply in debt to the multinational financial community that selling the entire country into slavery for the next 10 generations might not quite cover it. The fact does not excuse them, but it must surely damn their debtors.

I'd like to suggest that this is not a different problem than the failure to value the contribution of unpaid caregivers. It is not a different problem than the assignation of zero value to the ability of Pacific Northwest forest habitat to curb erosion, stabilize climate and retain water in the soil. It is not a different problem than making the collective decision to pay teachers, firefighters, police and civil transportation workers as little as we can get away with, which also means a collective decision to devalue the lives of those who depend on their services because they can't afford otherwise.

What we value as a society and as individuals says everything about us that truly needs saying. Not what we say we value, but what we are willing to put money down or forgo profit to preserve.

What do we value and how do we show it?

Posted by natasha at January 17, 2006 02:22 PM | Economy | Technorati links |

Excellent essay, my dear. Thank you.

Posted by: Mary at January 17, 2006 11:10 PM

Hello, that was really good. I really like Prof. Daly a lot but I have to criticize part of what he says:

Exactly what it is that value is being added to is a question to which little attention is given, since current approaches to valuation do not include natural resources. The gasoline price, for instance, does not factor the gasoline itself into the cost, but rather the labor and capital exended in drilling, pumping, and refining it. The value of the gasoline in situ is taken as zero.

This is factually incorrect. The royalties paid to the owner of the mineral rights, plus the rents appropriated by the producer, do constitute a small but significant share of the price of petrol at the pump. The issue here is political; it's not because economists are idiots. It's because most natural resources, especially those that are traded internationally, are ultimately under the control of sovereign states which must balance rival demands.

I would prefer that states used the industry's own calculations of time-discounted resources at their own word, and used dynamic optimization to maximize economic rents from the natural resources. The price of oil would go way, way, way, way up. That the owners don't do this themselves has to do with the obvious agency problem posed by de facto firm ownership of natural resources (even in the USA, the state notionally owns mineral rights). In plain English, this means that a manager of a firm does not have the same interests as the firm, since the firm [or its accumulated capital assets] can "live forever," and hence has an interest in prolonging the rate of extraction lest it exhaust its means of survival; in contrast, industrial managers have an interest in accelating the rate of extraction as their income is directly dependent upon short-term monopoly rents--after all, their career is only going to last a finite period of time.

Again, this is a problem of political constraints, not economic ignorance.

Also, it looks like Daly is reviving physiocratic doctrines.

Posted by: James R MacLean at January 19, 2006 03:34 PM