Composition, The Fallacy of

The fallacy that, because an asset or accomplishment is available to one person, it must therefore be available to all. In fact, there is a class of goods—known as positional goods—that can never be available to all, however much incomes may rise, and whatever forms of social engineering may be attempted. Examples:^C248

1. Strict scarcities (i.e., goods whose supply cannot rise in response to demand). There is only a limited number of idyllic houses in the remote countryside, period houses in pleasant towns and Old Masters. Even if incomes rose so that everyone could pay more for them, that would make no difference to the number of people who managed to own one.

2. Savings. It is sensible for one person to save a high proportion of her income in order to have more to spend in the future; but if everyone else did so, this would reduce demand and national income to the point at which everyone (on average) would have less to spend in the future (the Paradox of Thrift).^C249

3. Contest for rank and/or scarce jobs. If everyone improved their CV-writing skills, that would have no (direct) effect in getting more people into work. Napoleon liked to claim that every soldier carried a marshal’s baton in his pack. Not true.^C250

4. Labour-intensive work. While it is possible for some people to employ servants, it is impossible for everyone to do so because servants’ incomes have to be less than those of their employers. And domestic service belongs to a class of goods and services which does not benefit from the technological advances which reduce the costs of most others. Services of this kind, described by the economist William Baumol as “technologically non-progressive”, may well use modern techniques (such as email, or clinical drugs), but remain essentially labour-intensive. Other examples include social work, nursing, teaching and military service. The cost of technologically non-progressive goods and services will therefore inevitably rise relative to the cost of the technologically progressive sectors (such as manufacturing and, to some extent, large retail). This happens because estimates of price inflation, and the wage negotiations that are based on them, are arrived at by measurements of the changing cost of a standard “basket” of goods, most of which become, in real terms, cheaper over time, thanks to technical advance.^C251

Contrary to what you might expect, therefore, as an economy becomes richer, services such as nursing and domestic service become less affordable when compared with average levels of income. As overall productivity advances, the sector’s cost disadvantage will increase. And this disadvantage falls disproportionately on governments because so many of the labour-intensive services (e.g., social work and teaching) happen to be in the public sector. This helps to explain why governments’ financial troubles seem always to be getting worse. While it may be possible for a local authority to pay for social services for the elderly at the time a service is set up, it is likely to have greater difficulty in doing so as time goes by.

There are many trade-offs and mitigations here, but the central problem stands. The reason labour-intensive work is so expensive is that technological advance in the technologically-progressive sector has progressively priced it out of the market. Should the technologically-progressive sector go into retreat for any reason (such as peak oil), then the relative price of labour-intensive work will fall.

It may be that the possession of positional goods brings status too—and status is itself a positional good, but we do not need the idea of status here: the goods themselves are positional goods; they are widely-desired goods that cannot be replicated—or at least cannot be replicated very much. A necessary condition for some people having them is that other people don’t.^C252

The problem of positional goods will develop in an acute form when there is competition for resources. The price of one person’s success in getting hold of the resources he or she needs will be another person’s failure to do so. This is not a zero-sum game, which is simply about distribution (with the average outcome remaining unchanged); it is a negative-sum game, in which declining supply leaves the average consumer worse off. If the scarcities were deep enough, it could be a super-negative-sum game, in which every individual—even those most successful in maximising their own share—is worse off.

Positional goods are one member of the class of ideas dealing with composition status—the effect that other people’s intentions and actions have on your own. To put these into context, their effect may be:

1. Negative (Positional Goods)—other people’s actions may stop you doing something you want to do: the available land, energy and food goes to the minority that has the money, power, ingenuity and ruthlessness to make sure they get it.

2. Positive (Common Capability)—other people’s actions enable you to do something you want to do. Example: public services such as railways, which are possible only because many people use them.

3. Uncertain (the Prisoner’s Dilemma: see Leisure)—there is clearly a best thing to do, but it would involve trusting everyone else to do it, too. You can’t trust them to do it, so it doesn’t happen. Example: During a downturn in business, taxi drivers work longer hours to make up for it. But that does not increase the total available business; it just protects them from even greater losses, because they know all other taxi drivers are going to work longer hours too. If they all agreed not to work the longer hours, they would still get the same amount of business, at less cost in time and fuel. But such an agreement would be difficult to reach and impossible to guarantee. So they all work the longer hours.

It will be the economics of composition goods, rather than of a well-ordered regime in which supply responds to demand, which is characteristic of life after oil.

Related entries:

Needs and Wants, Economics > #6, Lean Economics.