MEASURING VALUE

Transcript of a talk by Martin Whitlock, author of Human Politics : Human Value, given at the Consciousness Café, Totnes, Devon - 22nd January 2015

Why would a talk with this title be relevant to discussion in a Consciousness Café, an event presumably intended to focus reflection on the relation between the inner human mind, and the external world of objects, people and activities that the mind inhabits?

I want to address that directly by suggesting that we live in a world of paradigms - systems of knowledge that we accept, often uncritically, because they make the world comprehensible for us - they make it possible for us to operate in the world.

When you buy something, you take it to the counter, hand over a specified amount of money and the ownership of that item transfers from the shop to yourself. Once you’ve done it once you don’t have to reinvent this system: the paradigm works in most situations of that sort.

It used to work in London, where vendors stood beside news stands selling copies of the Evening Standard. As people rushed into the station to catch their train it was quite an art to exchange the correct coins for the newspaper in a continuous passing gesture without fumbling, dropping anything or even slowing down.

Then, in 2009, something changed. There were still people in thick scarves and gloves standing beside the news stands, but instead of holding out the newspaper in the hope of a sale they simply thrust it into people’s hands as they passed.

Here was an example of a paradigm shift, in which people’s expectations underwent a significant change. The Standard wasn’t the first free newspaper, but it was among the most high-profile. The shift it was part of has take us to a new place, in which we no longer expect to pay for many things that we want.

People have often asked how “free” is free banking, and if you’ve ever has an unauthorised overdraft you will know the answer to that. But now we have free email, news-sites, social media, wi-fi access, online storage and cloud services, as well as “free” things that probably ought not to be, such as music downloads that people share freely among their friends.

We are, therefore, surrounded by paradigms that frame our lives in the world, and generally these are not frameworks of our own making. The Evening Standard did not go free because of a popular campaign. People did not demand a free evening newspaper in London, but the Standard’s owner decided to give them one because he could make more money by doing so.

The business plan is simple enough: by making the newspaper free the circulation nearly tripled, which caused the advertising revenues to increase more than enough to cover the expense of the giveaway. Google runs on the same principle. So do Facebook and Twitter. They all understand that if you place advertising in the space to which people turn when they want information and intercommunication, then the distinction between them are quickly blurred.

It doesn’t take long to work out who is in control of this process. The people framing the paradigm are in active pursuit of a specific agenda. The rest of us are adapting to the paradigm not because we have chosen it, but because it offers something that we are happy to accept. Our consciousness is dulled by these alluring offers; like the bread and circuses laid on by emperors courting popularity in ancient Rome, there is something hard not to like about companies that provide free information, communication and entertainment services.

The fact remains, however, that when we accept these services we are allowing outside agencies with their own agendas to make important judgements on our behalf about which things we value in our lives, and how much we value them. By deciding what we get for free, they are also deciding what we pay for, and how much we pay.

These agencies - mostly large corporations, but also governments and other public entities - are able to make these judgements with such certainly because, unlike us, they know exactly what they value. In most cases they value only one thing, which is money wealth, and they can measure it precisely both to see how much they have got and what they have to do to get more.

After all, the billions in revenues that Google, Facebook and their like accumulate have all come from advertisers selling goods and services that they charge for - for which we pay. The prices we pay includes the cost of that advertising, so we should not be surprised to discover that we are, in fact and of course, paying the entire cost of all those “free” services that make us feel so well looked-after.

And advertising is not even the half of it. Whenever we buy something, we are paying not just for the item, but the often enormous supply chain that the item drags with it. In my book I describe how a pair of training shoes may leave a factory in the Far East for as little as £3, but cost £80 in a shop on a British high street.

The customer may imagine that they are paying for a pair of shoes - that they are paying, in effect, for the work of making a pair of shoes. But in reality hardly anything of what they pay goes to the makers in this case.

It may be worth noting - in passing, and in the context of Totnes’s aspirations to be fair trade town - that the fair trade organisation BananaLink estimates that plantation workers - the people who actually produce the bananas - earn about a penny for each conventional banana sold in our shops. It is astonishing to think that an extra 6 pence on the price of a bunch of bananas could double the income of these workers - provided that extra money made it all the way along the supply chain to its productive source.

Supermarkets sometimes sell bananas at very low margins, or even as loss leaders, which itself sends pressure down the supply chain to reduce producer prices. In general, however, the biggest part of the ticket price of most retail items goes to the retailer, after whom come the the wholesalers, distributors, importers and other intermediaries. This why Apple is the world’s most successful retailer: by buying its phones and gadgets directly from factories in the Far East it cleans up not only the retail margin but all those intermediary margins as well.

And before the hard-pressed retailers among you jump to your feet in protest at all this talk of retail margins, it is important for the rest of us to remember that each level in the supply chain gathers about itself a host of accountants, lawyers, property developers, landlords, government officials, tax inspectors, bankers and many others, all of whom extract their livelihoods from the turnover of money that pays for the goods and services that we buy. Gross margins of 30% or even far more may drop to only a few per cent when all the overheads of trading are taken care of.

To understand better how this works, it is helpful to look carefully at the terminology that is conventionally applied in a supply chain. And here, more than anywhere in tonight’s discussion, I would make an appeal to heightened consciousness. We should bear in mind how often it happens that the person who controls the language of a debate also controls the paradigm within which it is conducted.

The key terms I want to look at in this context are “cost” and “value”. In passing I also want to draw attention to the way we use the word “producer”.

A producer makes or grows something. As a result of their work, something exists that did not exist before, and that something has value. “Value” means that somebody wants it, because the use or consumption of it will improve the quality of their life.

Reverting to bananas, and training shoes: the producers are the plantation or factory workers. Without them there are no bananas or training shoes. Even bananas growing in the wild have to be picked. Training shoes, it need hardly be said, do not grow in the wild. They have to be made.

In the conventional paradigm of a market economy, however, these workers are not producers. The plantation or factory owner is the producer, and their employees are a cost of production. To the owner, the value of their activity lies not in the bananas or training shoes themselves, nor in the work of their employees. To the owner, “value” lies in the difference between those costs of production and the price at which they can sell their goods.

The ownership of the goods may change several times in the supply chain, and at each point the same principle applies, with one difference. For the importers, wholesalers and even for the retailers the goods themselves are now part of the cost. Each makes their living not out of the goods, but out of the difference between the price at which they buy and they sell. Their business does not consist in supplying goods, but in making margins.

Ultimately, goods themselves only have value to two people - the true producer - the actual grower or maker, who lives by the work of their production - and the consumer - the person who wants them because they will improve the quality of their life. For everybody in between, from the factory owner to the retailer, value exists only in the margin they can make between the buying and the selling price.

We can see immediately how it works when we consider that everybody who buys and sells goods has a decision to make about sales volume and unit margin. Put simply, that means making a choice between selling lots of something at a small profit, or selling far fewer at a much higher profit. The key in all such businesses is to find the “pricing sweet spot” at which the highest amount of profit can be made.

And this applies not merely to the owners of the goods as they change hands along the supply chain, but to all the people who supply those owners - those accountants, lawyers, transporters, packagers, marketers, bankers, etc., who feed their services into the supply chain and extract a proportion of each owner’s profit for themselves. They, also, are buying and selling - buying skills and labour, as well as road diesel, office space, etc., etc. as cheaply as possible, and then selling their service for as much as they can.

The resulting profit defines “value” to people who buy and sell. And since most conventional economic activity consists of buying and selling, “profit” is closely associated with words like “success”, “prosperity” and “growth” in the standard economic paradigm to which we unconsciously subscribe.

From the point of view, however, of the two primary economic actors - the people who really matter in the economy, who are the true producer and the consumer - the profits made by people who buy and sell have no value at all, but are cost, pure and simple. The more profit that is extracted along the supply chain, the more the consumer will have to pay, and the less the producer will receive for their work.

Now, I’m fully aware that many people in this room make their living in precisely the sort of supply chain that I am describing. I know I do, and the fact is that most people in an economy such as Britain’s do earn their living in this way. Agriculture is a tiny part of the U.K. economy (<1% of gross value added); “production” (which includes the extractive industries) is only 14%; construction is 6%; services are nearly 80%.

It is also important to note that “services” includes things like car repairs, hairdressing, healthcare and education, all of which I would call productive (i.e. things that people value), while “production” includes things like packaging, that people might prefer to have less of.

So this is not a case of saying “production = good; services = bad”, but of inviting ourselves to consider what products and services we really do want to pay for, because they bring true value to our lives, and which ones we would prefer not to have to pay for if they could be avoided.

For example, there is a stack of my books at the back of the room. The cover price is £12.99, because, for some reason, no book can be taken seriously unless it has 99 pence in its price, but I’m selling them tonight for £10, or £9.99 if you really want your 1 penny change.

That may sound like a decent offer, but I can tell you that if you make me a counter-offer of anything over £6 I will still be doing better than almost any other sales channel that is available to me.

I won’t accept you offer, because I don’t want to help put more bookshops out of business. But the fact remains that if you order online or from a bookshop you will probably pay the full cover price and I will receive £6 or less, out of which I have to pay the price of sending the book to some central warehouse, and that warehouse will have to pay for sending the book either to you directly or to the shop where you ordered it.

So we have the bookshop’s profit, and the warehouse profit (although in the case of a firm like Amazon they get both of these) plus a share in the overheads of running the bookshop and the warehouse, plus two lots of delivery, and the overheads and profits associated with those. That’s an awful lot of cost that has to be borne by me (the producer) and you (the consumer), that can be cut out if I simply sell the book to you directly.

Now I must emphasise again that this is not to say that distribution does not have value, or that retailers do not add value, or that solicitors, accountants, packaging designers, transporters, advertisers, even bankers - in some cases - do not add value to our lives. Getting things from where they are to where they are wanted is valuable, just as a legally watertight contract or lease may be valuable if it helps us to sleep easier at night.

The distinction I am trying to bring to consciousness this evening is that which lies between things that have value in the sense that we would happily pay to have plenty of them - for example, education, good food, comfortable housing - and all the things that we are obliged to pay for, such as financial, legal, management, business and trading services, that in an ideal world we would rather have as little of as possible.

The key point is that all the things that are in the former category are the work of real producers, and all the things in the second category come between us as consumers and those real producers.

Despite which, according to the way that the economy is measured in official terms - in GDP or gross domestic product terms - those financial, legal, management, business and trading services are by far the biggest sector of the economy, and are responsible for producing most of its notional wealth.

In other words, most of the so-called wealth that the economy officially measures is stuff that, ideally, we would rather have as little of as possible. A much smaller proportion is the goods and services that we actually want.

Which brings me finally to my main point, which is why the way in which we measure value in the economy is so crucial.

If I grow carrots and you grow potatoes, and we exchange our produce over the garden fence, we engage in a transaction that is as efficient - as unwasteful - as it can possibly be. We are both producers and both consumers, and out of this exchange we both do as well as we possibly can.

But, according to the way that the economy is officially measured, because no money changes hands, this transaction has no value at all. This means that the government has no interest in encouraging an efficient transaction of this sort.

Now, if a cashless transaction between you and me as neighbours is efficient, even more efficient is a transaction between me and myself.

If I paint my own house ( or even build my own house), or grow my own food, or look after my own pre-school children rather than go to work to earn the money to send them to a childminder or Kindergarten - the connection between the producer (me) and the consumer (me) is about as efficient as it can be.

Or suppose I take time to go for a walk, which, if I do it routinely, will greatly reduce (on average) my chances of needing expensive health care as I get older;

Or if I cook a meal for my family, or simply spend time with my family, which makes me and (hopefully them) feel happier;

All these activities, and many, many like them, are productive of things that I value in my life. They are all things that I want, and want more of, and they are all economic goods in the broadest, human sense, but none of them has any value whatsoever according to the way that the nation’s economy is officially measured.

Since that measurement only recognises financial transactions, it drives official policy towards encouraging activities that generate as many financial transactions as possible.

So, to summarise: wealth in its true sense is only generated by actual, worthwhile production. Some of this is paid, but much of it comes from things that people do that is unpaid.

Meanwhile, much paid work is non-productive, with the pay extracted from other people’s productive work.

If, as a nation or political entity, we only measure paid work, and only count that as having value, not only do we do a lot of work that is unnecessary, but we also have much less time for the unpaid productive activities that we do for ourselves and the people around us.

We have allowed this to happen because we have become stuck in an unquestioned paradigm in which only a money transaction can create value.

We know, intuitively, that this is not true, but we’ve fallen into a classic error - the same error, incidentally, that is progressively degrading the education system in this country.

The error is to treat as important the thing that we can easily measure, rather than to try to measure the things that we know to be important.

For, only when we measure what matters to us can we start to build the social and economic policies that can improve the wellbeing of us all.