Monday, July 18, 2011

The Challenge of Economics

There will always be the need for money, possibly in the form of Replicator Rations.  This term was mentioned in Star Trek: Voyager, when the crew faced a situation where they were energy-limited.

I believe that the Replicator concepts will allow society to come to a more realistic standard measure of the true cost of goods. 

As I have said, the true cost of an object is a function of time and energy.  More practically, inherent cost is a function of the costs of materials, fabrication, transportation and assembly.  This formula can be applied to any object needed at any location.

A house identical to mine might have different inherent costs if it was built in different parts of the country - but only because of different transportation and assembly costs, not because the raw materials were any different or they were fabricated differently.  Lumping all these into an inherent cost allows us to examine the contrast with speculative cost.  I refer to speculative cost as the price that I would pay the builder or current owner of the house if I wanted to buy it. 

It seems that the most egregious abuses of the free market concept stem from the deliberate obfuscation of the value of an object.  When the consumer has no objective way to determine the value of the item he is buying, the seller has unlimited ability to manipulate prices.  The concept of a home appraisal based on local “comparable” sales is a case in point.  This can yield only an estimate of the speculative value of a home and can easily be manipulated on a local basis. 

The current mortgage crisis in the United States is due almost exclusively to this kind of abuse.  Unlike the stock market with strict disclosure and reporting requirements that allow investors to compare the inherent and speculative values of a company, the mortgage-backed securities market is a speculative market based on speculative values.  It is not possible for an investor to know anything about the underlying properties due to the bundled layers obscuring the ostensible inherent value.

Using these Replicator concepts, I propose that sellers of certain classes of objects should be required to disclose the inherent cost of the item.  Home appraisals should include a nationally standardized inherent valuation, along with the current speculative appraisal.  This would allow ordinary consumers to compare properties in much the same way that fuel efficiency numbers allow a consumer to estimate the operating costs of a car. 

The standardized inherent valuation would become a part of the mortgage paperwork and would form an inherent valuation for mortgage-backed securities.  This would allow investors to readily determine the comparative risk associated with different offerings by simply comparing the stable inherent valuation with the volatile speculative share price. 

There will still be free-market price fluctuations and trade will continue, but better informed investors will exhibit much less risk of unconstrained expansion leading to inevitable collapse.  You can still have a housing boom in an area without the artificial and temporary price inflation caused by unbridled speculation. 

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As part of this change to the appraisal of real property, I would also envision better stability in the taxation and insurance aspects. 

Local governments would be better able to budget for their residents if the property taxes were a function of the inherent value and thus did not fluctuate with the speculative markets.  Local sales tax revenue would be based on the speculative price and thus would provide extra revenue during growth and also help to dampen uncontrolled extravagance.  This would be a more fair prospect for both long-term residents and recent purchasers. 

Insurance companies are currently at a disadvantage in setting fair rates because they have only the arbitrary, speculative appraisal of the property.  In general, I would anticipate that the greater the spread between inherent and speculative valuation, the higher the insurance rates would be.  You could still insure your home for the speculative value, but the pressure to keep insurance rates reasonable would help to temper any wild increases in that value.

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Wise investors will shy away from an investment where the speculative price is too much greater than the inherent value.  All that being said, human nature and the lure of easy money will still override common sense.  It may be true that the occasional company such as Google will be a good speculative investment at a hundred times their inherent value.  But that doesn’t mean that every startup in the Dot Com era was worth that valuation.  And even the best disclosure laws cannot protect people from the consequences their own greed. 

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Now, or in the future, I am not anticipating any communist utopia.  There will still be plenty of opportunities for abuse.  The Martian colony’s commissar will still be able to divert resources by scheduling materials for his new dacha in the foothills of Olympus Mons ahead of the weekly bread production.

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