What's the value of the Universe in dollars? All of them
Physicist John Baez asks this question on his blog. It happens that I've been doing some thinking along similar lines that I'm trying to rough into shape. Consider this a draft.
You really cannot begin to answer this question without addressing several others:
- What is Price?
- What are cost and use value (value)?
- How do they relate to price?
- What is money?
It's not just me: economists have pondered similar questions since, well, before there was economics. Much of the history of theory from the time of Greeks until Adam Smith came along had to do with establishing what a fair price was. Much of his Wealth of Nations concerns the prices of various things: commodities, stocks, labour, rents. Ricardo, Jevons, a chap name William Foster Lloyd, Keynes, von Mises, and others before and since have speculated on value, price, cost, and money.
Price is a ratio. It's an expression of one thing in terms of another. Euros per kg. Donuts for a dollar. How many of my apples for your oranges. We use money rather than goods because it simplifies general exchange -- money is the universal good. More on this below. But the principle is the same, and in many times and places commodities have substituted for (and in cases become) cash: grain, cattle, gold and precious metals, pearls, cigarettes, alcohol.
Market price is the coincident market-level ratio at which the marginal seller is willing to give, and the marginal buyer willing to accept, a good. In a competitive market, the assumption is that both buyers and sellers are price takers, that is, they cannot themselves influence price, and their counterparty has full freedom to walk away and transact with another. (Markets in which this isn't the case aren't fully competitive.)
Which gets us to the first conundrum: the Universe doesn't exist in a market. There's nothing to give up for the Universe. It's everything. There are no counterparties, all are contained within it. The Universe then, transcends financial transactions. Price is undefined. The Universe is, if you will, an economic singularity.
If the concern is dollar price then there are several simpler reductions:
There are no dollars in the Universe beyond low-Earth orbit. There is no basis for exchange. Economic transactions are limited to those with expressible demand (that is: cash or credit in hand).
Dollars would be limited to the light cone spreading from Earth at the time of the creation of the first dollars, at a maximum. Or whenever credit starts to be beamed from Earth. The current maximum economic zone around Earth is then no greater than 240 light years (age of the United States, for which the dollar is currency), and most likely considerably smaller -- effective means of communicating at any distance off-planet dates to roughly the dawn of radio astronomy and constructing large radio telescopes such as Arecibo in Puerto Rico. Call that 60 light years.
Present value is another problem. Commerce would inherently require speed-of-light transmission delays. Even a 10 or 20 year future payment is discounted highly. Discounting for payments which won't be received for 27 billion years (round-trip signalling time across the visible universe, not allowing for expansion) is likely to be high, and present-value of such payments, well, "here's a nickle kid, tell the other side of the Universe I just outbid them" would net you vastly more value.
You could continue in a similar vein. Interstellar, let alone pan-Universal economics is likely to remain exceptionally small. Economists have actually modeled this, with Paul Krugman notably having a paper "The Theory of Interstellar Trade".
The attentive reader will note that I raised several questions but have answered few. So on to those: What are cost, value, price, and money, and how are they related?
Economists define cost as "what you must give up to acquire something". Krugman, in his textbook Economics, notes that all costs are opportuity costs. Which poses difficulties again in costing the Universe: what do you give up to gain the Universe? Absent money, what you give up to gain something is work, skill, capital, and resources. Among those resources might be considered the resources required to replenish those you've claimed, net of ambient flux. Or, more concretely illustrated, a crop of traditionally-harvested wheat entails seed corn (stock), a plow, other cultivating equipment, horse or oxen, feed, land, fertiliser, water (possibly as rain), topsoil, your time and labour, and sunlight. Some of those inputs you must specifically sequester, others are incidentally intercepted. There is a natural flux of rain which will fall on a field, after which it returns to the biosphere as runoff, evaporation and transpiration, filtering into groundwater, or as runoff. Similarly, whether you farm a field or not, the Sun shines and transmutes its millions of tons of hydrogen to helium every second. Your activities don't influence the flux of these inputs, only the useful exploitation of them.
However well-water, topsoil, additional fuels (wood, hay, coal, petroleum, natural gas), represent stocks of resources which you're utilising and which have some replenishment rate. If you're using these at rates greater than they're replenished, you're running down capital to generate present cashflow. This is among the fundamental criticisms of present economic and accounting principles, in that they don't properly account for such draw-downs.
Emergy as Cost Basis
Computing a cost for such draw-downs is difficult, but I'm leaning toward a couple of views. One is looking at emergy, with an 'M', that is, the "energy memory" of a good or service ("embedded energy" was another term suggested, though that has a different prior meaning). Emergy is expressed as a specific type of input energy, e.g., solar emergy being the net input energy to provide a resource. My view is to consider a source emergy as that whose flux isn't affected by human activity. That is, humans don't change the rate at which the source wastes energy to the Universe at large as heat.
All Earth-based resources derive from one of several emergy chains. The largest of these is solar flux, which drives virtually all biomass, hydro, wind, wave, and fossil fuel energy cycles. These are all fundamentally driven by the sun. Geothermal energy actually represents two emergy chains, one the latent kinetic energy heat of formation of Earth, from the Solar System's primordial dust and debris cloud, the other radioactive decay of heavy elements initially fused in supernovae or possibly neutron star collisions. The balance is about 50-50. Nuclear fission traces to the same source event, though is limited to the small fraction of heavy fissibles present in Earth's crust (most sank toward the core early in planetary evolution). Tidal energy is another flux related to the solar system's formation, and extracts energy from the orbital energy of the Earth-Moon pair. Fusion of light elements -- hydrogen, helium, and lithum -- taps into a power chain first primed by the Big Bang itself.
Conventional orthodox economics ignores this rather completely, with a very small number of exceptions. Full true emergy cost should likely consider these.
Value is another concept that's largely stumped economists. To be clear, I'm discussing use value when I use the term value. I refer to market value as price. See the classic discussion of the paradox of value between diamonds and water in Smith's Wealth.
W.F. Lloyd in lectures published in 1834, "A Lecture on the Notion of Value", correctly identifies that value is a relationship, and therefor is relative to those with whom value is compared. That is, there is no intrinsic value, and no absolute value (though Lloyd expresses some concerns with this). Portions of his lecture are earily prescient of Einstein's work some 60 years later.
Ludwig von Mises states as an axiom that value cannot be determined. As with many other of his axioms, he's wrong.
Most of conventional economics follows from Jeremy Bentham who proposed economics' phlogiston: "utility", a concept which is unmeasurable, and unquantifiable (though usually assumed rankable), and comprises the oddly insubstantial foundation of half of microeconomics (demand side). Again, I find this vaguely interesting but ultimately misguided.
The fields of ecology and sociology provide firmer ground. Both look at net throughput of energy as the measure of a population's, ecosystem's, or society's magnitude. See especially Leslie White, Alfred Lotka, and Howard and Eugene Odum. This gets closer to the the truth, but I suspect misses a significant element: the retained capital value. Here I need to revisit the work of Ilya Prigogine (chemist and Nobel laureate) and much more recently Jeremy England (physics, M.I.T.) both of whose calculations include an element for the retained value.
Eugene Odum's Fundamentals of Ecology lists money as the currency of economics, for which he's correct, and energy as the currency of ecology, for which he's incorrect. The proper comparison is that various cybernetics systems between individuals, populations, species, and ecosystems are the ecological analogs of money, and that the economic analog of energy is … energy. This also points at where economic systems are fundamentally different from other systems of individuals and populations: economics has a mechanism for accounting for perceived costs, values, and prices among agents. Other systems, generally, don't.
Though ultimately, the sustained energy throughput of a system, or its entropic gradient is probably what matters. And all evolving dissipative systems, including economies, exploit entropic gradients.
Which means that use-value, for any bounded system (individual, consumers in a market, region, national economy, planet) can be estimated by considering changes to net entropic flow resulting from increasing or reducing the availability of some element. In some cases, total removal is survivable (humans existed before cell phones), in others, not so much (oxygen). There's another factor: an ecosystem's adapability over time. Earth's atmosphere didn't always contain oxygen, and the story of how that came to be is probably the first known instance of biological life entirely exploiting one set of entropic potential (atmospheric methane and surface-strata oxygen uptake capacity in the Great Rusting), triggering an atmospheric calamity, global climate change, and long-lived consequences. The first billion to billion-and-a-half years of Earth's most advanced life-form to that date, cyanobacteria, consumed all methane in the atmosphere, rusted all available iron (creating much of the iron ore now being mined), killed themselves off (oxygen was toxic to most cyanobacteria), triggered global cooling by removing a potent greenhouse gas (methane) at a time of lower solar flux (the Sun gets hotter as it grows older), and a global Snowball Earth lasting perhaps 300 million years. Among the consequences is us.
So, modulo adapative capacities, we've got a basis for assessing value.
Over shorter terms, or even simultaneous observations (ecologists aren't plauged as are physicists by simultenaity, generally), biological or ecological activity in different environments can be observed, as with plant mass accumulation of a species observed at different altitudes.
Which leaves us with price.
Price, related to cost and value
Price, normally, is greater than cost, and less than value. Most early economists saw price as being established by costs, not value. I'm leaning toward the sense that in a competitive market, a seller has no interest in what the buyer's value is -- if a seller is a price-taker, this information has no value to them. And if the information has value, then ipso facto, the market isn't perefectly competitive.
With the marginal revolution in ecoomics of the 1870s and 1880s, a marginal theory of value emerged -- Walras, Jevons, Marshall, and Menger.
Many pre-industrial (and early-industrial) economists arrived at a labour theory of value. This is most commonly ascribed to Marx, but the concept features prominantly in Smith and Ricardo as well. And, in a pre-industrial age, labour is a good proxy for total costs. Not perfect -- by the 18th century, humans had already fully exploited and degraded entropic potential in several habitats, including Mesopotamia, deforestation of the Levant and Mediterranian basin (much due to early iron smelting using wood or charcoal), and were well on the way to a perpetual crushing poverty, discussed at length by Smith, in China. But at least over shorter terms -- a few centuries, perhaps a millennium -- human and animal labour using predominantly renewable sources of energy and materials kept accounts in balance.
With extensive use of fossil fuels and mining of fixed mineral resources, that's no longer the case. A true cost of fossil fuels would at a minumum consider the replacement costs of an equivalent hydrocarbon fuel. Coal substitutes for wood, petroleum for plant-based oils. Present costs for biodiesel not representing food-waste surplus run about $1000/bbl. There are proposals for synthesizing gasoline, kerosene, and diesel analogues via electrolysed hydrogen and sequestered carbon (seawater appears among the more viable sources) with estimates ranging from $3-$9/gallon ($126 - 378 /bbl). Or one can look at the energy costs. Presently petroleum returns about 30-40 units of energy for each (present) unit invested. Synthesized fuels would require two units of input energy per one unit delivered, raising energy-based costs by 60x - 80x.
Burning Buried Sunshine
Another view would look at the energy inputs represented by fossil fuels. I strongly recommend Jeffrey S. Dukes, "Burning Buried Sunshine" (2003). Briefly:
- One US gallon of petrol required 90 tonnes of ancient biomass.
- The rate of fuel consumption equals 400 years of total ancient annual net primary productivity (plant growth).
- Substitution from present NPP would increase human appropriation by approximately 50%, to over 60% of all NPP.
- The actual period of accumulation for fossil fuels burned in 1997 was five million years.
That is: annual fossil fuel consumption equals five million years of capital accumulation. And substitution from present plant growth is highly unlikely. Dukes' paper single-handedly convinced me that biofuels, at present rates of consumption -- or greater -- are a non-starter. That concept has the term HANNP, human appropriation of net primary productivity, or the somewhat more catchy version coined by Jared Diamond, the photosynthetic ceiling.
The Texas Railroad Commission
I'm suggesting that economic prices should factor this into account, and yet they don't. Some of the extents to which markets entirely fail to price resource stocks rationally are staggering. Daniel Yergin's book The Prize describes one such episode in chapter 13. Immediately following the East Texas Oilfield boom of the early 1930s. At the time, continued viability of the petroleum was in doubt, with known reserves, largely in Pennsylvania and Ohio, declining. Then Dad Joiner's Daisy Bradford #3 well blew in and all hell broke loose.
Upshot: the governors of Oklahoma and Texas called out their respective national guards, and the Texas rangers, to seize wellhead control at force of arms. Oil prices had fallen as low as $0.13/bbl, with $1/bbl seen as a minimum vailble sustainable price. Efforts to constrain extraction via quotas went through numerous rounds of battles in state and federal courts, with prices falling as low as two cents per barrel. Ultimately, the US Department of Interior and the somewhat inaccurately named Texas Railroad Commission established an extraction controls and quota system which was in effect from ~1933 to 1972. It terminated not from political pressure, but because there was no longer an excess extraction capacity to restrain. Some of you might recall events concerning oil supplies in 1973-74 -- that wasn't the first time Arab states tried to embargo oil, but it was the first time the efforts had an effect.
Which only illustrates that markets don't price in full value. It'd be awfully convenient if economics offered an extant rationale for why not. And I believe it does.
There's a concept called the shutdown decision. It states that a business (or worker) will continue to produce (or work) even when fixed costs aren't met, so long as variable costs of production are. That is, you're still losing money (or more importantly, wealth), but you're doing so more slowly. This is particularly the case when you've regular costs which must be met (corporate debt, mortgage payments). There's a strong case that the present tight oil markets globally, and especially in the US, reflect this. High costs of drilling and preparing fracked wells carry debt obligations which persist even if the well isn't extracting oil, so in a paradoxical and pathological twist, oil companies are incentivised to increase extraction as oil costs fall, to meet current obligations. Oil-exporting states with either domestic or foreign financial obligations supported by oil face similar logic.
Absent some means of addressing the write-down in capital (resource stocks) or of debt obligations, this picture's unlikely to change.
Which leaves us with a rather troubling problem: prices are arbitrary, and are dependent on the mental states of those seeking to buy or sell a good. Desperation, or irrational exuberance, on the part of either buyer or seller skews apparent values. A Spanish proverb reflects this: buy from desperate people, sell to newlyweds. See again W. F. Lloyd.
If price is notional, and a ratio, the rate of one thing that someone is willing to give up for another, then money is the universal good.
Money is traditionally seen as having four roles:
- As a medium of exchange.
- As a unit of value.
- As a store of wealth.
- (Sometimes) as a unit of deferred payment.
Adam Smith goes so far as to say that "the sole use of money is to circulate consumable goods". That uncharacteristically concise phrase unpacks to several interesting elements:
- There are no other valid uses of money.
- The goods must be consumable. Not, say, asset classes.
- The goods must circulate.
Money has been likened to many things, most of which I've come to believe are incorrect.
Many economics texts portray money as the "lifeblood" of the economy, and the banking and financial system as its heart.
Commentators with a bent to physics frequently try to describe money in terms of energy. This has some merits, but I feel is also ultimately flawed. In particular, I suspect that it falls prey to the notion that because currency is expressible in energy units, it's equivalent to energy units. But currency is expressible as anything which can be exchanged for money. Money is the ultimate exchange medium. Energy is expressible in dollars, pounds, Euros, Yen, Marks, rubles, or yuan because anything is.
Money is information.
That's actually deeply embedded in economic pricing theory; economists talk of price signals. Specifically, money is information concerning the propensity for economic actors to engage in transactions. While, as noted above, that propensity should (and in the long term does) reflect full actual costs, in the short term it needn't.
Going on somewhat shakier ground: money is a metric for the control costs of the economic system -- a measure of how much effort is required to regulate or controls flows of goods: resources, labour, services, capital.
If the economy is a control circuit, individual actors (people, companies, governments, organisations) are valves or gates. Money is the cost of opening (or closing) gates, through which goods flow.
Some gates are opened easily, some not (price). Some goods flows are high in value, some not (use value). Some are high in cost, some not (emergy cost).
Fossil fuels have a high emergy cost, low gate resistance, and high use value. But the gate locations are fairly few -- resources are highly unevenly distributed -- and cartelised control over those gates, as literally exhibited in Yergin's narrative, can control the value of further downstream gates (wholesale and retail prices).
Air and water are fairly constantly replenished -- they have low emergy cost -- but more importantly, they are fairly uniformly distributed. In non-desert environments, water is generally liberally available, and everywhere on Earth to several thousand meters above sea level, air and oxygen are abundant. Use value is high, but control cost is quite low.
And some costs are simply high. Lifting a ton of earth a certain distance requires energy, and there are few or no shortcuts around this (other than finding highly under-priced energy). The costs are otherwise high. Highly-manual labour -- something requiring skill, discretion, dexterity, or other attributes still largely limited to humans -- is another realm in which bypassing extant gates is difficult, and high costs apply. In a low-energy world, human labour is relatively cheap, in a high-energy world, it's relatively expensive.
Which gets to my larger point: economic prices are a mismeasure.
They're relevant within a given economic system, as those control costs are borne by, and largely result in profits of, the actors within the system. But they're almost entirely meaningless outside the system.
The basis of those prices is also almost entirely dependent on the context of that system. Economic value, without the economic infrastructure giving rise to that value, is near nil. This is where the fallacy of individual initiative starts showing itself. I've previously noted that in the event of a deadly disease outbreak, say, Ebola, what you don't want is to buy individual isolation garments. You want a highly effective quarantine and public health system. An isolation garmant buys you protection up until the point at which you've got to remove it (to eat, to drink, to urinate or defecate, to allow sweat to evaporate). At which time you've lost containment. Surviving a massive epidemic typically requires at least reconstructing a small-scale society. Boccaccio's Decameron illustrates one such: a group of young people who decamped from Florence to escape the plague for several weeks, having structure, food, water, and apparently sufficient services to see them through. Real-life versions include a castle which isolated itself during the plague and avoided infection. Iceland, isolated from mainland Europe, staved off onset of the Black Death for some years, but it eventually paid a visit.
Another element is that cost, value, and price, are significantly independent of one another. So long as long-term fixed or resource costs can be ignored, prices can fall to effectively nil. High cost doesn't entail high value, or vice versa, and hence, price can float quite frustratingly independent of actual real cost or value.
Externalities factor in essentially as excessively distributed control gates -- without single points of control, externalities (positive or negative, of production or consumption) will exist. That's a whole further slew of economic paradoxes and failures there.
But there are some takeaways of all of this:
- It's not that we cannot ascribe prices to noneconomic entities. It's that economic price is an inherently limited concept.
- The Universe is still, literally, priceless. It has no overall control circuit, it's not an open system, it cannot be exchanged. The Universe is all value yet has no price. It transcends price.
- Within defined open systems, e.g., the Earth as a whole, we can define some overall ecological costs based on emergy, and accrued capital, looking to Prigogine and England. These dwarf any possible economic accounting, and existing estimates of economic value of ecosystem services under-value these to the extreme.
- Cost, value, and price are three distinct phenomena. They have similar units. They shouldn't be confused.
- Value (use value) can be determined both marginally and as an absolute, through reducing or amending quantities. Marginal use values may vary quite considerably.
Value is a relationship between object and valuer. It is not an intrinsic attribute. It is not absolute.
- Money is information valid within a specific context. It is a pointer to value, it isn't value itself. Money is not energy, though it's exchangable for energy, as it is for any other commercial commodity or good.
- If there isn't a controllable exchange and transaction, there isn't an economic value.
- There are values other than economic ones. Ecologically and cosmologically based values dwarf economic ones. Economic values are based within these systems.
- Open systems are lossy.
There are a few further concepts I'd like to work into this, among them:
- Gresham's law. Costs, value, quality, and information, generally, aren't immediately apparent, have their own access costs, and pose multiple failures. This is far more profound within economics than is generally realised.
- Howard Odum's "energy circuit" ecological concept. Also mentioned earlier by Aldo Leopold.
- Time-based transfers. Would it be possible to buy, sell, let, or hire the Universe for a specific period of time? Meaningfully?