Saturday, April 13, 2019

Economics, the Realm of Money and the Significance of GDP Growth, with an Application to Child Labor

What’s economics?  There are two answers.  One is it’s the sphere of human activity encompassing the production and distribution of goods and services, which has sometimes been referred to as provisioning.  This is quite a lot but not everything.  It includes meditation classes but not meditation, making and selling binoculars but not bird-watching, etc.  The problem is that it includes so much of human life that it is barely a delineation at all.  From this perspective farming is part of the economy, and so is shopping for food, cooking the food at home, and even piling some of it on your plate.  It’s a matter of debate whether eating the food should qualify as economic, not to mention the trip to the toilet sometime later.  (I think the answer should be yes to the toilet part.)

Then there’s a much narrower conception that confines itself to just the money economy, things that are produced for sale, paid labor, and money congealed into financial assets and obligations.  This is largely what mainstream economics is about, although it claims to be about human well-being in a much more encompassing sense, using welfarism as a bridge between the empirical world of markets and the putative substrate of “utility”.

In the end, the reason for attaching a label like economics to some portion of human activity is practical: to guide a division of labor that allows us to balance the demand for specialized expertise with the need to remain aware of the interconnections that matter in real life.  I suspect the line ought to be drawn differently for different motivating questions, different types of societies, maybe even different individuals and their intellectual skills and backgrounds.

What I want to suggest is a way of thinking about the relationship between these two conceptions.  Think of the money economy as the fungible component of provisioning.  That’s what money does: everything that’s exchangeable for money is exchangeable for everything else with this same property.  The non-monetary economy is not fungible; there are limited options for parting with some elements of it for more of other elements.  Restaurant cooking is part of the fungible world.  I can spend more money eating out, or I can save up and buy a camera, or piano lessons or a savings account that allows me to eat out more ten or twenty years from now.  Cooking at home is only slightly exchangeable.  I can cook less in order to do something else with that particular bit of time, but unless I use the time to acquire money the number of things I can exchange with cooking is limited.

So how much does fungibility matter?  The one thing fungible goods do have going for them is a range of choice, since if you have any of them you can exchange them for others.  Otherwise there is no relationship between how fungible an activity or good is and how important it is to my well-being.  Love is right up there at the top of values, and it is famously nonfungible: money can’t buy me love.  Some environmental impacts are fungible, some aren’t, since the interdependent character of ecological relationships sets severe limits to the notion of chopping the natural world into pieces that can be managed through generalized exchange.  Political goods, like freedom and democracy, aren’t fungible at all.  Health?  In some ways yes, in others no.

An important consideration is that fungibility matters more the more widespread it is.  In societies where only a very few goods and services are exchanged for money—which means most societies in most periods of human history—the money economy plays a relatively small role in human well-being and the dynamics of social change.  The increasing extent of fungibility as a core characteristic of modernity is equally why the money economy now matters much more to us.  This is an important consideration in debates about the role of GDP growth as a guide to economic and social policy.  It is objectively true to say that monetary measures of prosperity like GDP per capita (or better, median measures of money income or consumption) are vitally important today, because a large portion of what people need is part of the fungible universe.  It is also true, however, that many essential goods are still not fungible and will probably never be, so a fixation on monetary indicators is a serious mistake.  Access to higher levels of money income matters more to nearly everyone in the world than was the case in former times, but it’s still not everything—not even close.

I’ve thought about this in connection with child labor.  Even before the rise of child labor “protagonism”, that opposes efforts to eliminate child labor in the name of respecting children’s agency and opposing eurocentrism, I encountered resistance to the notion that children should be in school rather than working full-time at home or in the fields.  By trying to reduce child labor I was advancing the monetary economy over the competing claims of the traditional economy of household and kin, of the intergenerational transmission of culture and knowledge through joint work, of self-provision.  And it was true.  But when I thought about the world these children would be living in over the decades to come, it seemed clear to me that enough of what they needed for a good life would be in the fungible realm that lack of education would mean a lifetime of deprivation.  That isn’t true for each single child, but it will probably be true for the vast majority.  Seeing the matter in purely monetary terms is simplistic, but still seems to me to be the proper starting point.


marcel proust said...

ISTM that an equivalent or even better way to think about this than fungibility is the division of labor, which both Smith and Durkheim made central to their analyses. Where the DoL is sufficiently extensive, we get mass production and along the way, fungibility. But it depends, I believe, on the DoL.

Peter Dorman said...

M. Proust: A DoL is a precondition for exchange, but you can have the first without the second. The classic patriarchal household is built on a DoL, but the services of the wife are not fungible.

Bruce Wilder said...

The "fungibility" money introduces has a strong time dimension.

I do not think people always appreciate how limited the possibilities for making a deal with the future are in the absence of money. Debts and savings and insurance.

Peter T said...

Nice post.

I think close attention to where the boundary is - and what causes it to shift - is an essential in understanding economic aspects of society. The time dimension is important, particularly in regard to debt (less so to insurance and savings - saving pretty much always relates to the fungible economy, and much insurance is social or collective, like the commitment to care for elders or children).

The growth of the monetary economy for everyday things (food, clothing, household services...) has interestingly been accompanied by its contraction in other areas.One could, for instance, buy and sell people in 1850, and 5 or 6 adult people could be exchanged for a house in New York. Even apart from slavery, there were indentures and sending one's children into service, and contract forms which limited the ability to sell one's labour freely. Some (not enough) of the natural environment has been detached from the monetary economy (the certificates of a company formed to render penguins down for oil are still available as curios, I believe).

Point is - the proper starting point is not to see the matter in monetary terms, but first to delineate what money is, and what it covers (and does not cover). Then one can look at its operation and - just as important - the effects of changes in the boundary.

RW said...

A modest riff on Bruce Wilder's comment WRT time dimension. Alexis de Tocqueville wrote in Democracy in America, Ch 18 viz

"No great change takes place in human institutions without involving among its causes the law of inheritance. When the law of primogeniture obtained in the South, each family was represented by a wealthy individual, who was neither compelled nor induced to labor; and he was surrounded, as by parasitic plants, by the other members of his family, ...who led the same kind of life as himself. ... No sooner was the law of primogeniture abolished than fortunes began to diminish and all the families of the country were simultaneously reduced to a state in which labor became necessary to existence ..." ( )

The wealthy have succeeded in fully resurrecting their status and power via corporate, estate and trust law with the bonus that divisibility of modern financial assets allows lesser scions of noble houses access to the same legally protected, intergenerational trough that was once the exclusive right of firstborn; e.g., the majority of super-wealthy in the United States will soon be heirs rather than 'entrepreneurs' (e.g., )

marcel proust said...

Replying to Peter Dorman: ... but the services of the wife are not fungible.

Yes: some sort of DoL has existed in human societies since before the neolithic revolution. It was thoughts along these lines that induced me to mention "where the DoL is sufficiently extensive." Fungibility to any degree becomes possible only once the DoL has developed sufficiently beyond that primitive level. What seems key to me is that process of development and growth.

Peter Dorman said...

MP: We are thinking about different questions. You are asking the Smithian question about the preconditions for the development of an advanced DoL. I am asking how we should interpret GDP growth or median income as an indicator of well-being. That's about the relationship between goods purchasable on the market to those not. This has become a key issue that divides people like myself, for whom poverty defined largely in monetary terms is a central problem, from those who have taken the "cultural turn" and reject commodification and the monetary economy tout court. This plays out in many areas, including child labor. My post should be seen partly as a general inquiry about modernity and well-being and partly as a specific riposte to the culturalists. What makes the question interesting, of course, is that fact that many essential goods are nonfungible and destined to remain so.

marcel proust said...

Thank you for this explanation (and your patience). I had misunderstood the point of the post. It now makes much more sense to me.

Anonymous said...

Fine post and perfect comment:

The "fungibility" money introduces has a strong time dimension.

I do not think people always appreciate how limited the possibilities for making a deal with the future are in the absence of money. Debts and savings and insurance.

reason said...

I also found Bruce Wilder's comment good. On a personal it is great to see Bruce (who has a great intellect) making a positive rather than falling into political nihilism.

But back to the OP. I have always thought that economics has never properly defined its field of study and this is one of its great problems. Economists are often talking about different things which leads to mutual misunderstanding because of precisely what they are (often unconsciously) excluding. Personally, I think economics SHOULD be defined as human ecology. Thus demography and the environment need to be included.