The Cost of Things

We humans value economic goods. But everything we value doesn’t necessarily have to be an economic good. What’s the defining characteristic? The demand for the good has to exceed the supply for it to be thought of as an economic good.

Let’s look at some goods and ask if they are economic goods or not. You are walking along a clear mountain stream in the wilderness. Is the water an economic good? No, because the demand for the water in the stream (only you are the consumer for miles around) is much less than the supply. Is the water of value to you? It certainly is: you can drink the water or take a bath. A thing of value need not be an economic good but any economic good has a positive value (and conversely, an economic bad has a negative value.)

With the progress of civilization, the number of economic goods (and bads) have increased. To hunter-gatherers, the animals they hunted and the fruits, nuts and berries they gathered were valuable. Whether or not these things were economic goods or not depended on the relative abundance of the things and the number of people doing the hunting-gathering.

Is fertile land an economic good? Fertile land is valuable for farming. Therefore before the advent of agriculture, it was not of any value, and was not an economic good. After agriculture began, fertile land became valuable but it was still not an economic good as long as there were few people on the land. Whoever wanted could use as much as he pleased for farming. Fertile land became an economic good when the population increased beyond a certain number.

Nature provides stuff — land, water, minerals, flora and fauna. Whether something is of value or not depends on the state of the technology. Crude oil in the ground is pretty worthless if you don’t know how to use the oil. And even when you do figure out what to do with it, if there’s so much of it that you can use as much as you wished, it’s not an economic good.

Most economic goods have to be made. That means they have a positive cost. Therefore economic goods have a positive price. Economic goods can be traded; non-economic goods, even if they are of value, cannot be traded.

To produce goods, inputs are required. We call them “factors of production” in the same way that multiplying the factors 2 and 5 results in the product 10.

Factors of production are usually classified as land, labor, and capital. Land stands for all the nature provided stuff — land, air, minerals in the ground, water, etc. Labor is human (or perhaps domesticated animal) labor. Capital is the rest: machines and other intermediate stuff. And of course, you need technology to combine all that to produce whatever you want to produce.

The cost of production is therefore the sum of the cost of all those factors of production. It can be computed but you may have to do a lot of arithmetic and a lot of bookkeeping. If you do that, you will figure out the total cost.

Here’s a surprising claim. The cost of any economic good is the cost of the energy that went into its production. We can go into why this is so later. If this is true, then it follows that the cost would fall if the cost of energy falls. And if the cost of energy tends to go close to zero, then the cost of everything would tend toward zero. In other words, super abundance.

Super abundance is just round the corner, just over the horizon.

Author: Atanu Dey

Economist. View all posts by Atanu Dey