Mankind has always tried to quantify relevant phenomena of life: what time is it, how many dollars do we have, how many cc’s does a motor have, how much something vibrates per second, how old we are, etc. In our everyday conversations, it sounds so ordinary for the table in metres to be 1 unit long, for the movie to last 2 hours in time and for there to be 100 dollars in our wallets. We do not realize that these are completely abstract systems which make communication easier, but if the abstract system for some reason is unable to describe reality properly, it becomes difficult to articulate what we are actually talking about.
Meters, Dollars, and Frogs
Creating unit of measurements and its quantities is trivial. You just need a number – let it be 2 – and put a unit system behind it – it can be kg for mass – and voilà, you get that your bag of potatoes weighs 2 kg. In the case of natural sciences, labelling the world by metrics does not cause so much trouble, whether one is talking about length or pressure since 1 metre is still 1 metre even on the Moon. Conversion systems are exact, laboratory results can be generalised to a definable part of reality and instruments of measurement are precisely calibrated. But what happens when we want to determine the value of something? Humans invented the concept of money for the measurement of value thousands of years ago, yet we think about it in similar terms to the metrics of natural sciences. We determine the quantity and put the unit of measurement behind it: the value of 1 kg bread is 500 in Hungarian Forints, and to find the equivalent in Euros, we calculate according to the exchange rate. So far, it does not seem to be so intangible, since it is an everyday situation, but if someone is wondering how much a company is worth and whether its value is realistic on the stock market, it is worth thinking about its expressed value. The MSCI World is a stock market index which contains over 1,500 companies in the developed world, and it can provide a comprehensive view about the value of relevant stocks of the global market. The index increased by 13% in 2020, however this was only measured in dollars – in gold it dropped by 25%. It is worth thinking about whether the value of the companies had drastically increased, or if the power of the dollar bill had declined. Measuring value in an abstract system is limited only by one’s imagination, therefore, something’s value can be measured even in African clawed frogs. But, while gold has been always an alternative to money for historical and practical reasons, the association between money and the African clawed frog is not a direct one, so it is no wonder why economists have not yet contemplated this possibility. It is reasonable to think that the African clawed frog will never be used in any financial systems, but the framework of this monetary system might influence our short-term understanding of reality.
How Discount Supermarkets Make Money
Authors of economics textbooks might shed a tear of joy seeing how discount chains such as Aldi and Lidl operate. A competitive market and the law of supply-and-demand have created conditions where economists are eager for market-dictated prices. Why is the invisible hand of the free market able to set the best prices for everyone in these cases? Well, stores such as Aldi and Lidl deal with scalable and optimisable activities. They distribute fewer products in larger volumes compared to their competitors. Because of this, they are able to ask for lower prices from their suppliers. The organisation of their staff is optimisable: products are not re-arranged frequently, saving a lot of unnecessary work, and products are stored in easy-to-carry boxes, making stocking quicker. They spend money for marketing purposes as little as possible, and they only rent buildings the size that they need, reducing running expenses. Leaders of these discount chains are quite aware of the fact that they can make money in one way only: selling as much product as possible. As a result, all costs are reduced that are not directly linked to the sale of the goods: marketing, rental fees, and labour expenses. They can do so because these activities are quite easy to describe with numbers: How many boxes can be put on the shelves per minute? How many products can be stored in a shelf? How many types of products should be distributed? How many products should be in each category? Are lower prices still obtainable while ordering in large volumes? What should be the opening hours? To what extent is the impact of a marketing campaign reflected in sales? The main characteristic of these activities lies in their scalability, therefore using money as a quantitative tool of measuring value provides clarity for decision-makers. This fulfils every economics textbook authors’ dreams: fair distribution of scarce resources, preferably in a way whereas many people as possible get the best product for the lowest price.
Education vs. Economics
However, life hardly has only scalable and optimisable domains that are important for the functioning of society. Can the education prices at the equilibrium of supply-and-demand be viewed with the same satiety as the situations with the abovementioned discount chains? Education is nearly never optimisable: there is a finite number of teachers with a finite number of students. A company can sell millions of products in different locations in the world, whereas a school cannot export so easily its main “product”: teaching and mentoring students. While more products can be produced within certain limits – if demand requires it – the ratio of teachers to pupils is not so self-evidently modifiable. Attention can only come from people, so it cannot be produced in factories in the same way, say, cereals are, if supply expansion would be needed. Thus, when private sectors dominate in organizing education, those who are in possession of outstanding resources might purchase the supply of education, causing the market prices to increase. Undeniably, scholarships and a more inclusive admission process might help integrate those who yearn for an intellectually demanding life, so the aim of this paragraph is not to create unreasonable consternation. Rather, what I wish to highlight is how differently the market can allocate resources in areas with different specificity.
In the previous paragraphs, I took the effects on prices at the equilibrium of supply-and-demand using an easily quantifiable activity (sales) and compared them to a more difficult to quantify activity (education). Economics’ main virtue is its emphasis on probability-weighted outcomes, so there is no doubt as to why numbers play such a crucial part in this discipline. Still, throughout history, we can see many cases where policymakers focused merely on generating higher outcomes and, consequently, disregarded activities that would provide room for higher added-value jobs in the long-term.
The Trap of Quick National Growth
The economic history of particular developing countries seems to follow a deterministically dramatic cycle. In general, it starts with the population being dissatisfied with their country’s standard of living, therefore demanding economic growth. Initially, governments create demand for domestic products. This is usually achieved through foreign capital controls and fiscal stimulus, disregarding the rising budget deficits. They spend more and more on nominal wage increases and regulations for market prices. Since these are all consumption-enhancing steps and inflation is kept low by price controls, the gap between nominal and real GDP shrinks; GDP indicates economic growth, and the numbers forecast a brighter future. At this point, politicians declare that they have reinvented the wheel, or some sort of unprecedented economic miracle. The good news is that this phase can last for some political cycles, but the system will eventually reach its limits; there will be no new investments in a fiscally and monetarily overheated economy, since no steps had been taken to improve everyday living standards, and policymakers had forgotten to create the necessary conditions: infrastructure, education, the rule of law, predictability, the independence of institutions, innovation, etc. The bad news is that the next phase is inevitable; the nominal money being poured into the still-developing economy will sooner or later lead to hyperinflation, resulting in a currency collapse. And as unemployment rises, people will start to revolt, leading to a political and public security disaster. To add onto this disaster, the working and lower-middle classes who would vote for the policy of growth at any price – they are the ones who were promised a better life – would be the ones hit hardest by inflation and underinvestment. In the midst of all this chaos, policymakers would be forced to take action; they usually attempt to fix fiscal policy with an IMF bailout and austerity measures. Indeed, these steps stabilise the economy to a certain level, but this level is no higher than it was before the overheated economy, which makes the demands from the public for higher welfare levels understandable. Unfortunately, some countries do not learn from their mistakes and start again with redistributive and reactive economic policies – the economic trajectories of some Latin American countries (e.g. Argentina, Peru) have fallen into this pattern for almost 100 years.
By all means, metrics, indicators, and numbers make things comparable and measurable; they provide policymakers a clearer insight. But, all in all, these figures bring forth an abstract system with its peculiarity. No matter how much effort someone makes to “hack” economics and its abstractions, reality always emerges eventually.