The Answer To Diminishing Returns
Just hear me out: The Labor Theory of Value is kinda-sorta right.
The Labor Theory of Value (LTV) and Supply And Demand Theory of Value both face quandaries once the issue of too much debt, too little ROI, and little labor-required due to technological efficiency arises.
Too much debt; more focus on repayment.
Diminishing ROI; technological efficiency, global trade, outsourcing of jobs.
Labor-required has fallen due to economic efficiency. Goods break less, machinery is efficient, and people can acquire goods needed and wanted with less labor and capital than before.
Ricardo Rings Right In The Long-Run
In the minds of any economy-worshiper, whether neocon, neolib, libertarian, the issue of diminishing returns arises, and the nature of political economy arises as the variable factor in a dilemma that must be solved. However, the political nature of economy is useful insofar it impacts the pricing of commodities directly through fixing, indirectly through taxation, and via protectionism. It is not to say the government of a nation can’t radically impact the pricing of commodities or labor, but it is short or medium-term, and all things equal, there is a “restoration” to a natural price, or mean-reversion, that brings the political nature into question, as it is independent of technological advancement, and therefore, the necessity of labor.
That being the case, an inevitable mean-reversion leaves any nation of political animals in a state of decadence, while the ever-dreading curve of ROI due to technological advancement (and soon-after, technological efficiency) leaves these political animals left questioning why a nation is poorer, and what should be done politically to reach their goals. Unfortunately, these goals are never reached, and only act as ineffectual or as exacerbators of the issue.
In The Principles of Political Economy and Taxation (Chapter 30, pg. 260), David Ricardo remarked briefly on the issue with the Supply & Demand Theory of Value (known formally as the Subjective Theory of Value, STV):
It is the cost of production which must ultimately regulate the price of commodities, and not, as has been often said, the proportion between the supply and demand: the proportion between supply and demand may, indeed, for a time, affect the market value of a commodity, until it is supplied in greater or less abundance, according as the demand may have increased or diminished; but this effect will be only of temporary duration.
Diminish the cost of production of hats, and their price will ultimately fall to their new natural price, although the demand should be doubled, trebled, or quadrupled. Diminish the cost of subsidence of men, by diminishing the natural price of food and clothing by which life is sustained, and wages will ultimately fall, notwithstanding that the demand for laborers may very greatly increase.
He was not talking in an absolute sense that STV is incorrect, but making the poignant, and underrecognized, observation that if you are able to permanently lower the cost of labor, then you thereby permanently lower the cost of production and therefore commodities. Even in the issue of money supply fluctuations, the natural cost of labor does not change, as the existence of new machinery permanently impacts cost. This is where value is inherently found - in the base cost of operations involved in the production of a commodity. This would explain the issue, he earlier discusses in this book, of diminishing returns:
If the shoes and clothing of the laborer could, by improvements in machinery, be produced by one-fourth of the labor now necessary to their production, they would probably fall 75%; but so far is it from being true that the laborer would thereby be enabled permanently to consume four coats or four pairs of shoes, instead of one, that it is probable his wages would in no long time be adjusted by the effects of competition, and the stimulus to population, to the new value of the necessaries on which they were expended. If these improvements extended to all the objects of the laborer’s consumption, we should find him probably, at the end of a very few years, in possession of only a small, if any, addition to his enjoyments, although the exchangeable value of those commodities, compared with any other commodity, in the manufacture of which no such improvement were made, had sustained a very considerable reduction; and though they were the produce of a very considerably diminished quantity of labor.
This is what Ricardo described as “equilibrium” wherein the market price can be altered for a time, but if labor price stays the same, then the price of a commodity will move back to its natural value. That is to say, if the price of labor to produce a commodity goes down, so will the price of a commodity, and ultimately, I would argue, with the addition of debt to the equation, so does the return, as the price to play becomes too high for the return. Such is the case in residential real estate, where prices are so elevated in labor and commodities, therefore the only way to garner the same return one would from middle income apartment buildings just a few years ago, they must build luxury apartments. However, since there is too much debt, and not enough money, the construction of this excess infrastructure will only face a reckoning similar to that of the mortgage crisis in 2007-2010. This all stems from an incongruence in price and natural value. Once these prices fall to their natural value, or as we would say “mean-revert” the return to “equilibrium” will be met.
This explanation would greatly admonish anyone who thinks that government is a proxy for altering reality in favor of or against market pricing, as there is a reverberation somewhere within the economy that will be felt. Rather, to explain this issue of diminishing returns, an issue that is central to lowering interest rates, infrastructural decay, and global economic woes, and therefore cultural and spiritual woes, we must look no further than the value of labor, and how such a dilemma is not resolved by artificially increasing it, as a neolib might, artificially stagnating it, as a neocon might, or artificially diminishing it, as a libertarian might - because the issue of prices are not solved by prices themselves, nor the whim of a sovereign, but the inherent value of commodities in a system, which is determined by the employment of capital of capitalists (banksters and venture capitalists), and the technological efficiency within the system.
Our economic dilemma, therefore, is not something resolved of abundance, nor of starvation, but of perspective, and if we wish to remedy the issue of diminishing returns, then we must shift focus from efficiency, and to spirit, beauty, and community. The issue in both the capitalist and socialist system is an issue of a materialist ontology (line-go-upism, thank you Ryan, I love that term) that is central to all issues being resolved, and as all economic issues in a democratic commonwealth are made central in the Faustian Man’s decaying legislatures, the issue of diminishing returns is made political, but truly it is not a political question, but one of perspective, one of a disinterest of capital employment, and one of technological efficiency.
The Subjectivist Theory Of Value
This is where STV, the theory that ultimately price is value, and therefore the market is where value is derived, does have its issues. For instance, when nickel futures are heavily shorted by a Chinese Businessman, and he gets squeezed, the price will blow up. Does this mean that the intrinsic value of nickel changes? Does this mean that its, let’s say, “generally agreed-upon price” is fluid and fluctuating? (Is value gender-fluid?) Maybe. It definitely means, though, that a speculator got short-squeezed. It probably means that the value was not represented by price.
This theory is further admonishable when Neoclassicalists attempt to use it to describe “real” and “nominal” values, although the price of money is unfixed at all times. The value of a commodity arises from its ability to be garnered. If oil becomes easier to get, it will become naturally cheaper, as oil companies compete to sell more barrels, however, if say collusion is involved to keep the price heightened (cartels and monopolies), all that will happen is less barrels will be bought. If somehow a system is sent out of its equilibrium, even the Neoclassicalists will agree, that there will be a breaking point where either the “misallocation” of capital is going into an industry producing something truly less value.
However, say the innovation of petroleum engineering leads to a lower price of oil, making it more efficient, the supply and demand does not change, which begs the question of STV’s absolute legitimacy as an explanation for the price-value equivalence.
However, with respect to criticisms of Ricardo’s theories (which many are quite valid), the main point behind his LTV orthodoxy is to explain the true relationship between value, price, and the ebbs and flows of wealth between moneyed interests/capitalists, landlords, and labor, that STV does not explain.
Technological efficiency, being the greatest unintentional prediction that Ricardo hinted at, flies in the face of anyone who associates diminishing returns with the phenomena of “inflation” or “government regulation.” The issue of inflation is not remedied when the real price of labor has stayed stagnant, and prices have stayed relatively the same, or are relatively lower, in most or all commodities, pre-2020. When the issue of the money multiplier is taken into account, and the real net worth and money velocity is quite stagnant, then the misunderstanding of “moneyprinting” for supposed monetary inflation doesn’t answer the question of diminishing returns. Wages, prices, and profits have been basically stagnant since 2008.
In the case of government regulation, the point still stands, the market has continue to buy what monopolies sell to them, regardless of what is added or subtracted from their new technologies. The system tries to become more efficient, which has in fact pushed up the price of cars in the last decade, however, it has only created a lopsided favoring of industries that benefit from emissions-regulating and safety technologies. In this sense, STV is correct, and can describe the fluidity and “awkwardness” of pricing, but when such pricing is inevitably remedied due to the state’s lopsided favoring of certain technologies, the price of a vehicle will return to its natural value (almost like an ethereal shelling point).
Anytime an artificial skewing of price happens, the distortion causes an issue that will be reckoned as the proclivity towards the generally agreed-upon price is met due to whatever base technology and labor exists within the economy.
This is why as the value of technology begins to cheapen, and the proclivity of the economy ebbs towards cheap products over quality products, the investment needed to further gain efficiency will be too risky for any investor to want to employ his capital. In times past, there were further technologies to provide further return, but when there is less and less return, due to products produced being cheaper and more efficient, the need for competition or further innovation is less demanded, and any further investment into the economy, in the form of lending, will only exacerbate the issue of too much debt that will have to be paid down with less and less return.
Spirituality and Economy - The Proclivity Towards Collectivism In Eras Of Diminishing Returns
In order for this economy to function, it needs to create further exponential return that encourages further venture capital to be invested in further technologies and companies. This is why the issue is not manmade, but simply innate to an efficiency-based economy. For all economic schools of thought, the ever-present issue of technological efficiency simply solving itself with further innovation is muddied by the ever-present long-term issue of debt proliferation and the tendency for technology to become “perfect.”
Profits will decrease, therefore likely will wages, and therefore likely will prices, as the increase of dollars in the real economy is not happening, and will continue to not happen, because wealth is not being created at the rate it had been for the past 200 years. This benefits savers, and punishes debtors.
This is why the issue of economics, and furthermore praxeology, has left the issue of prosperity and wealth proliferation unsolved, because the human condition is not specifically looking to expand relentlessly, and acquire convenience and resources relentlessly, but his very nature is curiosity, and that has been hindered by the modern world. Perhaps, if he were given another try, in a more closed economic system (there is no such thing as an absolutely closed system, except maybe the universe), man would try to establish something similar to that which Catholic Europe established in the medieval era, where resource and capital expenditure was poured into beautiful works of art, architecture, and culture, rather than convenience and dopamine.
Or like the man who desires to create free technology to be used open source, for simply the principle of fostering community, the economist of this next chapter of humanity may understand that value is not equivalent to price, but to the productive capacity of a nation or community, and therefore, the price of something is not dependent upon efficiency, but ultimately, the perspective of the buyer, and his interest in fostering trust and love among his community-members, which would derive a lopsided outcome of income being put into expenditure, and therefore, into building community. Perhaps, man is not utterly and solely driven by his need to gain further yield on his investment, nor a laborer seeking to excite his dopamine receptors, but a spiritual being.
We have seen what efficiency does to prices, and therefore wealth, so perhaps capital investment should be put towards more cultural affairs, and not that of needless expansion, the fostering of infrastructural overcapacity, as we have only seen this reach its limits, and will spill over into a giant issue of maintenance crises and likely collapse. This is where the dilemma of even self-interest must be questioned, and even debt issuance.
In Conclusion
Price fluctuations, in the long-term, are dependent upon labor and technological advancement. In the short and medium-term, they are impacted by events. In the long-long-term, they lead towards diminishing returns, and an economic dilemma only solved by some sort of jubilee, and likely, decentralization of the economy to a point it resets trust, pacts and covenants are able to be restored, and the likely proclivity towards collectivism, and community, reaps rewards of more communally-oriented and culturally-oriented affairs.
In the era of diminishing returns, however, the issuance of debt only furthers the diminishment, debt-forgiveness/jubilee only destroys trust in the system, and money-printing/Universal Basic Income yields lopsided results as money goes to paying down debt and consumptive affairs that further weigh down on the economy’s productive capacity, as laborers refuse to work, and capitalists are paying down debt.
The only way back is down.
“Nothing you have not given away will ever really be yours.”
C.S. Lewis