Economics2030

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No account of the history of the 20th century has yet addressed what may be the greatest change it produced in the conduct of human affairs.

Two world wars, the Russian revolution, nuclear weapons, the Cold War, the coming of electricity, the jet engine and the microchip, artificial means of birth control and space travel have all been the subject of extensive examination.

So it is a curious anomaly that no one has yet written an account of a world-changing conceptual breakthrough that altered the course of human history more profoundly than politics, revolution, war and technology. Without it, the extraordinary violence and creativity of modern era would have been impossible. Its discovery and universal use did nothing less than make the 20th century possible.

You may be wondering what this remarkable omission from the records may be.

Was it an act or an accident? Or was it an idea or an invention?

It was in fact none of the above and, at the same time, arguably all of them. It was the market-clearing price, something that in reality only exists in our heads yet somehow orders everyone everywhere and always to do its bidding.

Economics2030 examines how the idea of the market-clearing price eventually emerged in the final decades of the 19th century after more than 2,000 years of debate. It was finally defined in a book by a Cambridge University professor published in 1890. This was an event that history has largely ignored. But its impact has been enormous.

The idea of the market-clearing price freed human beings to get on with the business of producing and consuming without pondering excessively, if at all, about the true value of what they were doing. Without it, mass production and long-term investment would have been impossible. The market-clearing price automatically distributed goods and surpluses in a way that provided sufficient incentives for people to make decisions about whether to consume today or to save for tomorrow through the impersonal mechanism of the market.

Trillions of daily decisions that otherwise would have been difficult or impossible were simplified to the extent than an average 7-year old could make most of them. You just compared prices and chose.

The idea of the market-clearing price allowed governments and corporations to intervene in human affairs on an unprecedented scale.

Many of the great events of the past 100 years would have been impossible without it. Stalin would have been unable to master the largest country on earth and Franklin Roosevelt to launch the New Deal. Nazi Germany couldn’t have developed the capacity to launch a continental war of conquest and genocidal mass murder. Mao Zedong might have seized power in China, but it would have been impossible for him to keep it. And the US could not have put people on the moon on 1969 without the efficiencies the idea of a market-clearing price allowed.

There had been visionaries before. But the market-clearing price allowed dreams to be turned into reality by encouraging the discovery of new technologies that freed a growing proportion of the world’s population from the mundane task of simply producing sufficient things to survive. It wrecked many human lives, but it saved many more. For this, the market-clearing price, the distilled essence of every human aspiration, should not be lauded. It has no ego and no imagination.

There had been megalomaniacs before. But the idea of the market-clearing price empowered them to mobilise human energy and material wealth for destructive purposes without parallel in human history. Price, the apotheosis of rationality, is responsible, but cannot be blamed. It has no conscience and can have no soul.

The market-clearing price is now such an obvious and pervasive idea that it seems ludicrous that so much, both good and evil, should be laid at its door. Violent events — wars and revolutions — scar our memories and stir our emotions. Technology, which has obviously changed the way we live, seems a much more exciting topic. Ideas stimulate our minds.

But prices? Surely they are as significant as advances in shopping and much less interesting. Economists who grappled with the concepts that eventually led to the crystallisation of the idea of the market-clearing price didn’t do much to help. They are the authors of some of the most incomprehensible books ever written.

For centuries, thinkers investigated what prices were using every philosophical and scientific technique at their disposal. For those who thought of themselves as economists, the issue, however, was like an untreated toothache: a persistent irritation but not life-threatening. What mattered were production, consumption, investment and saving and counselling leaders of nations and business about the best way of increasing all of them quickly. This was the route to fame and fortune, not theorising about what price was and did. More often than not, economists simply gave up wondering about price completely and got down to the practical issues of commerce and government. And when the concept of the market-clearing price eventually emerged, it was almost immediately rejected as a matter worth worrying about because it was regarded as being essentially uncontrollable, probably misleading or both.

The collapse of faith in central planning and government intervention in the 1970s inspired a renaissance in belief in the power of idea of the market-clearing price, and yet we were still left dissatisfied. There is no doubt that humanity had an uncomfortable relationship with price and continues to do so. At times, we convinced ourselves we could do without it entirely, but 21st century started with us all, apparently, under its thumb.

Economics2030, however, is not primarily an account of the origins and implications of the market-clearing price. It is about how it has now been deposed due to the rise of the service economy, the source of the majority of income, wealth and employment in every advanced economy on earth.

Like the discovery of the market-clearing price 120 years ago, this startling fact has also gone largely unnoticed. And yet it is at the very heart of the economic crisis that developed in 2007/08, a seminal moment in global economic affairs that continues to weigh upon economic policymakers and theorists. The fall of the market-clearing price as the key factor driving human affairs has implications so far-reaching it is almost impossible to overstate them.  In death, as in life, the market-clearing price, or its absence, will change every aspect of life for everyone, everywhere.

This book in divided into six chapters. The first tells the story of the discovery of the idea of the market-clearing price. The second examines the theory that supports the notion that price delivers a fair and efficient outcome by automatically addressing the challenge of allocating scarce means among an infinite number of ends. It concludes, using logical argument, that the theory fails when applied coherently to decision-making about intangibles or services. The third reframes the history of economic development in light of the theoretical argument presented in the second. the fourth explores the implications for the business corporation when economies are dominated by intangible inputs and outputs and where capital is largely or wholly intangible. The implications for government are examined in chapter five The final chapter concludes with a meditation on the broader consequences of the irresistible rise of services.

This book is the product of extensive study of contemporary and classical writing about economics, but it owes at least as much to practical experience. It is obvious to those making a living in the real world that conventional economic theory is failing to provide an intellectually and intuitively satisfying response to the two most important questions economists address: what is economic value? And how is it produced? Economics2030 is an attempt at a better answer.

There are nine arguments on this site that cover the concepts and arguments advanced by Economics2030. These are:

• The idea of the market-clearing price as an automatic and beneficial mechanism delivering outcomes in markets for goods and services that were both efficient and fair emerged in the final decades of the 19th century.
• The idea of the market-clearing price allowed consumers and producers to make choices about consumption, saving, production and investment by comparing prices.
• The idea of the market-clearing price made possible the emergence of mass consumer markets and mass production. It stimulated the growth of large-scale corporations and facilitated unprecedented government intervention in economic affairs.
• The emergence of the market-clearing price as the central factor in economic affairs was followed by a decline in the contribution tangible good production made to economic output. By the end of the second decade of the 21st century, more than 80 per cent of GDP in many advanced economies was accounted for by services (intangibles).
• The economics of intangible production and consumption invalidates the role of price in stimulating production, consumption, saving and investment in services.
• Value in intangible production is created through interactive relationships at the individual level among participants in service markets.
• Technology has led to the separation of the process – the tangibles and mechanisms that support value-creation – from the relationship at the individual level where value is actually created in services.
• In intangibles, markets and industries necessary for the production and consumption of tangibles are being replaced by intuitively-defined communities within which individuals interact to create value.
• Companies producing intangibles will face a growing calculation problem because of the decline of the validity of price as a stimulant of service production and consumption.
• Companies producing services with horizontal structures, minimal centralised decision-making and no external financial liabilities will have a competitive advantage compared with competitors that do not.
• The separation of process from relationship in value-creation in services will encourage companies to focus on one of the two critical skills in service value creation.
• Governments face challenges in creating value in the service markets they participate in and should concentrate on the process elements of service value-creation.
• The rise of service industries raises questions about ideas of social and economic progress that have been dominant for two centuries.

Economics2030 is owned and managed by Edmund O’Sullivan, an economist, writer, author, filmmaker and consultant.