Jimmy Akin

Suppose that you are a defense contractor and that one night you are abducted by aliens who are bent on undermining Earth’s planetary defenses.

The aliens tamper with your brain and implant the idea that, instead of building your current defense project (a new kind of jet fighter that is just the thing to knock down pesky flying saucers) out of metal, you should build it out of toothpicks instead as this will make it really extra strong and light and good at knocking down flying saucers.

They also also abduct all of your employees, so they all think this is a great idea, too.

Thus you set to work building the great toothpick fighterplane.

You order large quantities of toothpicks and glue and your workers eagerly set about building the toothpick fighters. MillionsBillions of dollars are spent on acquiring enough toothpicks and glue to make numerous planes entirely out of toothpicks.

Your brain-poisoned employees labor happily and energetically and put in long hours, for which you happily pay them their salaries plus overtime, they are such effective and enthusiastic workers.

You also pay for their medical insurance, which is needed to cover the innumerable and unavoidable splinters in workers’ fingers, the resulting infections, and the constant faintings and work-related accidents from inhaling too much of the everpresent glue fumes.

Finally, the fighters are ready to deliver to the Pentagon (which for some reason has been remarkably lax when it comes to inspecting how the project is going). You and your workers couldn’t be prouder of the wobbly, creaky fleet of toothpick fighters that you have produced, and you are very much looking forward to the Pentagon taking delivery of them and giving you the multi-billion dollar check you need to replenish your company’s now badly-depleted bank accounts.

It therefore comes as a total shock to you when the Pentagon says that it won’t pay!

You’re devastated!

You complain!

You try to argue them into paying!

You point out all the "advantages" that the aliens made you believe toothpick fighters would have!

You point out that vast sums of money went into the raw materials for the planes!

You have your human resources department trot out documentation showing all of the countless hours of regular time and overtime that your workers worked.

You point out that Catholic social doctrine holds that workers need to be paid a just wage allowing them to support themselves and their families with human dignity.

Yet for all this the Pentagon remains completely unmoved.

It believes the planes are, in its word, "Useless."

And, again in it’s words, it’s "Not paying."

What does this teach us?

That we all need to sleep with a can of Grey-Away next to our beds?

That we need to constantly monitor ourselves for traces of alien mind manipulation?

That an invasion is imminent?

No.

It does, however, teach us a very fundamental lesson about economics.

Many people, thinking from the viewpoint of a product producer, suppose that the value of an item is determined by the raw materials or the labor that went into making it.

This is false.

The real value of an item is not determined by raw materials or labor but utility. A fleet of toothpick fighter planes is useless for making war against aliens since they will shake apart before they even lift off the runway. They thus have no value to the Pentagon.

This shows something about where value is established: It isn’t fundamentally determined on the side of the seller but on the part of the buyer (at least in the sense of the word that I’m discussing). Buyers who place more value on a product will pay more for it.

Of course, the seller can try to generate value in the buyer’s mind by advertising to him all of the ways in which the thing could be useful to him (even if that’s just making the buyer look more "cool" and "hip" to others). He can even refuse to sell the item if his price isn’t met and thus try convincing the seller up in what price he’s willing to pay, but that is just a way of sharpening for the buyer a choice between having the item and the value he perceives in it and not having it.

Ultimately, it is how useful a buyer perceives an item to be, or how much he values it, that determines what price he is willing to pay for it.

Now that the Pentagon has passed on your fleet of toothpick fighter planes, your best bet is to sell them as works of art (at vastly reduced prices that will at best only recoup part of your costs in making them).

You and your employees also probably want to let the Pentagon study your brains to figure out what the aliens did to them and how to protect other defense contactors from the same treatment.

An alien invasion may be imminent.

One of H. P. Lovecraft’s most famous works is The Shadow out of Time, in which a 1908 professor of economics has his mind mentally switched with an inhuman being belonging to a civilization that lived millions of years ago. The foreign being’s mind lives in his body, and he lives in the foreign being’s body back in the remote past.

The switch happens when the professor is giving a lecture in economics to his students. He’s suddenly faints and, when he is brought round, it appears to everyone that he has a case of amnesia. (It’s really the foreign being who has no knowledge of the professor’s life.)

The being’s job is to research human culture in the early 20th century, and it stays five years at the task. But in 1913, it concludes that it has learned all it can and returns to its own time, simultaneously returning the economist to his own body.

In the story, the professor describes what happened he he first awoke after the being’s departure, having no memory of what had transpired:

About 11.30 I muttered some very curious syllables–syllables which seemed unrelated to any human speech. I appeared, too, to struggle against something. Then, just afternoon–the housekeeper and the maid having meanwhile returned–I began to mutter in English.

"–of the orthodox economists of that period, Jevons typifies the prevailing trend toward scientific correlation. His attempt to link the commercial cycle of prosperity and depression with the physical cycle of the solar spots forms perhaps the apex of–"

Nathaniel Wingate Peaslee had come back–a spirit in whose time scale it was still Thursday morning in 1908, with the economics class gazing up at the battered desk on the platform.

When I first read the bit about linking the economic cycle to sunspots, I laughed. I figured it was just a joke on Lovecraft’s part. Though initially very conservative, Lovecraft by this late point in his life (in the middle of the depression) was impoverished and entertaining a form of socialism. I reckoned he was just spoofing the economics of the earlier period by making up a fantastically absurd theory.

But he wasn’t!

It turns out that the "Jevons" he mentions was a real guy–William Stanley Jevons (1835-1882)–a real economist, who really did advocate the idea that the economic cycle is linked to sunspot activity:

In 1875 and 1878, Jevons read two papers before the British Association which expounded his famous "sunspot theory" of the business cycle.  Digging through mountains of statistics of economic and meteorological data, Jevons argued that there was a connection between the timing of commercial crises and the solar cycle.  The basic chain of events was that variations in sunspots affect the power of the sun’s rays, influencing the bountifulness of harvests and thus the price of corn which, in turn, affected business confidence and gave rise to commercial crises. 

Jevons changed his story several times (e.g. he replaced his European harvest-price-crisis logic with an Indian harvest-imports-crisis channel).  However flimsy his explanations, Jevons believed that the periodicity of the solar cycle and commercial crises — approximately 10.5 years, by his calculations — was too coincidental to be dismissed.  Needless to say, all this was a bit on the cranky end and, ultimately, the statistics did not bear him out. 

Nonetheless, it remains a significant piece of work as this was perhaps the first time that the phenomenon of the business cycle was identified.  Economists had long been aware that business activity had its ups and downs, but not that they necessarily followed any regular pattern.  They generally believed that "crises" arrived haphazardly, punctuating the smooth advance of the economy at irregular intervals. Jevons was perhaps the first economist to argue that the phases of business activity had a regular, measurable and predictable periodicity [SOURCE].

Don’t that beat all!

What Lovecraft says about Jevons being characteristic of the economists of the period trying to link economics with science is also true. Economics was then being constituted as a social science and there was a lot of borrowing of terms and concepts from other sciences (e.g., physics, mathematics, biology). Jevons’ sunspot theory may indeed represent a kind of apex to this process.

Two points to Lovecraft!

BTW, this is going to be economics week here on the blog. I hope to have a string of (hopefully entertaining) pieces of economics, putting up one each day.