Prices and costs, taxes and subsidies

 Adapted from an audio recording by Ken Webster 

''' Prices are messages. It helps if they ‘tell the truth’   ' ''

 "The market is a great servant, a poor master and worse religion” - Jon Eatwell 

Prices are messages. That’s the first thing most businesses recognise. It helps in deciding whether to produce, trade, offer services, sell or hold, invest or leave the market. The price to the buyer is also a rather complex message which is assumed to give a sense of what something is worth, and to allow supposedly rational choices to be made. It is complex because there are values embedded. An example would be an expensive perfume or hi-fi. It may be expensive because it is expected to be, and to have it cheaply would reflect badly on the status of the buyer. Prices can then be social messages: “Look. I can afford this.”

Welcome to the familiar modern world of ‘identity’, who we are is said to be established through what we own, and the power of branding. With brands we are reassured: “I belong.” It is no mystery why sports shoes’ actual cost of production is often a fraction of its sale price. It is the brand that is being sold not the material.

So, prices are complex messages but it is widely assumed that resources are allocated efficiently when a market allows many buyers and sellers to negotiate freely and to enter and leave the market freely, and to know what everyone knows, freely. The image we are given is often that of a town market, busy, full of stalls run by vendors and an even larger number of potential customers, looking for the best that their money can buy. It assumes the buyers and sellers are rational – that they can think objectively and, of course, freely – and looking for the most ‘utility’ from their actions. It is labelled a ‘free market’ because it makes a number of assumptions about the actors in the market, most of which are sadly more aspirational than real.

A free market would be a good idea if it actually happened but it doesn’t happen very often because the conditions which make it work are often partially or wholly missing, for example, there might only be a few sellers and many buyers or the other way around, or they might not have the same information, or the freedom to join or leave the market as they wish.



In some countries agreeing a price is described as ‘making peace over the price’, so that both sides are happy, or at least satisfied. That is what haggling over a price tries to establish. The idea of markets is very old but seeing it, today, as some grown up town market in medieval times is unhelpful. However, it is still a place where buyers and sellers meet and decisions are made.

Within its bounds, the idea of a well-oiled market as a tool assisting buyers and sellers to make rational decisions about resources and choices is pretty familiar and widely accepted. To make markets work requires accurate information, meaningful information and comprehensive information. Elevating the tool to function like a court or arbiter where the important decision is whether the proposal is ‘economic’ or not could make the market a master. So how is this ‘worse’ than being a ‘servant’? If it’s a way of deciding what to produce, whether it is growing apples or building schools. If it’s a mechanism, a law of resources and choices, surely nothing can go wrong. Let’s follow this idea of a market being a kind of court or place of judgement for resources.

If prices are messages (between buyers and sellers) they can only advance justice at the ‘court of the economic’ by telling the truth. But what if prices are incomplete messages, they then – in the language of courts – bear false witness. The court is being compromised. It may sound dramatic but if the full costs, the real costs of the extraction, production and disposal of waste and its impact on workers are not accounted for as part of the market price because they have been borne by the environment and society at large then rational decisions cannot be made. These are of course the ‘externalities’, those costs not paid for by the seller or, often, the buyer. However, this mentality begs the question: external to what exactly on a fully connected planet? Where is ‘away’? If rationality matters (well, it is the whole rationale behind the market) then the ‘economic court’ of a free market is undermined by its own limitations (1).

In practice, many vital resources not only fail to be fully costed, but they are pushed below  even partial ‘market’ prices by being actively subsidised by governments across the globe. In the famous study by Prof Myers at the turn of the millennium, subsidies which accelerated the unsustainable exploitation of resources in just the six key areas of fossil fuels, agriculture, fishing, forestry and water were worth nearly $2 trillion dollars a year (2).

Perverse subsidies are large in other senses:

• They are almost three times as large as global military spending per year.

• They are larger than the annual sales of the 20 largest corporations.

• They are four times as much as the annual cash incomes of the 1.3 billion poorest people.

• They are five times as much as the international narcotics industry.

• They are half again as large as the global fossil-fuels industry or the global insurance industry.

So, it’s quite interesting to talk about prices as messages, and it goes as far as the question of taxes. Taxes are the other side of government subsidies, ways of changing prices upwards from where they would normally be. A tax shift (let’s assume the overall burden of taxes remains the same) from what is good and valuable – such as people having jobs, to those things which are less desirable, such as waste and raw material extraction (compared to recovering materials) or fossil fuel energy could be consistent with accelerating a shift towards a circular economy (3) which generally means using more labour – at least regionally. Taxing renewables like labour, keeps their use lower than it could be because it makes their price higher. Employ a worker and you have tax and national insurance to pay as well as the take home pay. Buy a machine instead and you can get a tax break. It might be an enormously important step to let markets work better, to get to a more level playing field, by dropping perverse subsidies and perverse taxes.

In fact, make it stronger than that. Since markets are so important, if they are not effective, comprehensive tools then a shift to a circular economy might be really hard to do no matter what the clever designers, engineers and materials scientists achieve.

And that quote at the top of the page? Markets are potentially great servants – if they do what is instructed – but a poor master, because they are incomplete descriptions if all relevant costs are not included. They are not presently capable of delivering justice. They are also incomplete in that they can say something about ‘value’ but only the human community can bring in ‘values’. Markets, in theory, have no values, they cannot say what is right or wrong. A classic case of confusing what works with whether it is worthwhile – or even an adequate way of describing more than a part of what makes a human being. Markets can help once the values are clear. Making it a religion, a question of faith or something to believe in, well that is irrational of course, as all faith is. It would be a bit like worshipping a gun or a laptop. This would be mistaken identity or a cripplingly narrow sense of meaning.

Notes:

(1) http://www.natcap.org/sitepages/pid69.php

(2) http://www.iisd.org/economics/subsidies/perverse_subsidies.asp

(3) See Walter Stahel’s work on taxes and the circular economy at: http://www.triplepundit.com/2012/02/sustainable-taxation-create-circular-economy/

{C}[CV1] Is this referring to the diagram below?