Yeah, the day I realized that the economic notion of value was weighted according to the wealth of those creating the demand, while the colloquial definition generally isn't, a lot of mismatched puzzle pieces fell into place. It was probably the single most successful update to my worldview (measured in terms of predictive power) that I have ever made.
I have a similar but different take on the weighting around politics.
Our politicians are influence (unavoidably!) by the people who have the most time and money to spend lobbying them. Even if you reformed lobbying, this would still be the case - even if it was all just letter-writing with no money attached. Wealthy people could send way more letters than harried poor ones.
So the more you have, the more influence you get. BUT the more you have, the more you can fend for yourself, so also the less you need much of that influence! And then the government being unaligned with the needs of most people starts making a lot of sense, without even needing malicious conspiracies.
There's neither profit for businesses nor politicians in giving poor people what they need.
> Surely you aren't both suggesting sense and dollars are non-overlapping?
The difference is the perspective of time.
A quick buck versus a strategic investment.
e.g. What made sense to Page and Brin in 1998 - the algorithm that would become famous as Page Rank, had only a trivial market value at the time, whilst Yahoo was "worth" billions.
With free capital markets, the stewards of that capital are ostensibly responsible to the consumers that generate its revenue. Jeff Bezos can afford to dally in space exploration, but if he fails to appoint a capable successor CEO for Amazon, then eventually consumers will go elsewhere, the value of Amazon stock will fall to zero, and he won't be able to afford his pet projects anymore. Hence there's an ultimate check on his ability to "vote with his dollars", even though he has hundreds of billions of them.
A further productive update to your worldview might be "The degree of centralization of power is proportional to how far out of equilibrium a market can get." This doesn't just function at the macro level (i.e. Google/Facebook/Bezos being able to horribly misallocate capital based on their past successes). It also explains things like bad executives within a corporation: because decision-making is centralized and the results of a decision won't be seen for years, a bad executive can waste billions of dollars and thousands of man-years, but ultimately they're going to get kicked out (or the company goes bankrupt) and the organization will return to market norms. This is also one reason for the liquidity premium (and hence high compensation) for executives: since the consequences of a bad hire are so bad and so future-loaded, companies tend to be overcautious in their hiring, which means only people with excellent pedigrees are considered and they can demand a premium for it.
Also very relevant to historical China, which had this habit of centralizing extreme power with the emperor. Things would go great if you had a good emperor. But occasionally they'd make a blunder (like the cessation of the Ming treasure fleets) that profoundly altered the course of human history. The European powers had much more decentralized decision-making. When Columbus was turned down by the kings of England, France, and Portugal, he tried Spain, and the rest is history.
Sure. Hyperbolic example: a starving orphan and a king are both looking for dinner. The orphan has no money -- therefore, the economic value of feeding the orphan is zero. The king, of course, is loaded, and pays an enormous premium for tiny asymptotic improvements in perceived quality because he can. The market value of chasing those asymptotic improvements is enormous.
Would you say that the value of feeding the orphan is zero?
Would you say that the value of chasing those asymptotic improvements is enormous?
Key observation: the market notion of value is very different from what people would colloquially agree is valuable.
Economists would say this is obvious. In one sense, it is -- we've all seen it in a million (hopefully) less-extreme incarnations. However, if you were to watch these economists closely, within 60 seconds of claiming it was obvious, they would kick out an argument that fudges the distinction between the economic notion of value and, well, value (the colloquial notion of value should really need no qualifier -- I applied one above simply to highlight that it had been hijacked).
That's the bit to pay attention to: substituting the concept of "economic value" for "value." This innocent-sounding approximation is actually a trojan horse containing extreme laissez-faire assumptions. With a mere slip of the tongue, they invite you (or you invite yourself!) to assume the conclusion of any economic rationalization, cloaking whatever cockeyed scheme the markets have cooked up today in a veil of artificial legitimacy.
Anyway, the day I plugged this into my worldview and forcibly separated the concept of economic value from the concept of value, something interesting happened. I previously had two competing views of the economy:
1. Gee, it sure seems to always act as a mercenary for the rich and powerful an awful lot.
2. It is a tool for revealing, weighing, subdividing, balancing, and reconciling collective preferences, both directly and transitively.
Before I separated the notion of "economic value" from the notion of "value" in my head, I was willing to accept that perhaps the hierarchies and mercenary behavior of #1 were merely emergent properties of an optimization process that truly did maximize value per #2. (Note -- I said "value," not "economic value." Did you catch that?) I saw this as a deeply legitimizing factor for economics in general, especially because I was keenly aware of failures in the colloquial definition of value (it's really bad at transitivity, for instance).
After I separated the notion of "economic value" from the notion of "value" in my head, I realized that the weighing factor made the optimization process of #2 equivalent to the mercenary process of #1. If a few people have all the money, then "weighing collective preferences" just means doing what those people want. To the degree that's currently the case, the optimization process is a silly ruse. It's a continuum, though. If everyone has some money, everyone gets represented in the decision making. If a large group of people -- say, "the middle class" -- has all the money, their collective interests will be well represented, but those on the bottom get drowned out. "Economic value" begins to diverge from "value." If a few people have all the money, they are the only ones who decide what's (economically) valuable, preferences of everyone else be damned. "Economic value" diverges completely from "value." In short, the divergence between what's valuable and what's economically valuable is proportional to the level of inequality.
The subtle nastiness of this situation is that the system runs away. You start with market forces that truly do represent the collective will of the people but as the wealth starts to concentrate more and more, the weighing factor increasingly disregards the voices on the bottom and pays more attention to those on top. Stocks go up, jobs disappear, rent increases, wages stagnate, poverty skyrockets -- apply the weighing factor and you see that none of these are bugs. They are all features. The predictive capability of our worldview has increased.
There is hope, though. Chaos is the enemy of skewed wealth distributions, of consolidated power, and ultimately of this divergence between value & economic value. There are exponentially more ways for wealth to be mixed than for it to be concentrated, so any kind of chaos can make it happen. Capitalism is anti-fragile -- it degenerates into feudal exploitative nastiness if you leave it alone, but if you stir the pot once in a while it truly is the marvel that economists paint it to be. How to do that? Well, in the happy case the chaos comes from growth. In the sad case, it comes from violence. Here's hoping the next big upset comes soon and from growth, rather than stagnation and eventual violence.
I think you're pointing to the wrong problem. In economies where "stocks go up", food and many other goods tend to be very cheap (when measured in hours of unskilled labor). The problem comes from two specific goods, housing and healthcare, which for some reason don't become cheap. We need a correct tested theory of why that difference happens, that's the only way toward solving the problem.
In housing, that's zoning for single-family houses which limits affordability and provides exclusivity vs. apartments or boarding houses, except in downtown cores which aren't enough supply to really move the needle (and expensive for other reasons).
In US healthcare, it appears there is regulatory capture from insurance companies and private health care providers, both successfully ganging up on the government to minimize real competition or strict price regulation.
Without real competition for a product that consumers can't feasibly opt out of, no heavyweight market participant interested in driving the price down, that's what you get. But yeah, testing is good too. Get the government to try out 10 years of broadly available at-cost housing competition and public healthcare, then evaluate :-P
