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How much, whom to, and why
does the civilization overpay for oil?

2. Cost price definition

All the numerous and diverse types of labor that are necessary to keep the civilization running are based on one and the same biological magnitude of food consumption by human body (metabolic rate). This metabolic rate (around 100 Watts for adults) is the universal energetic basis of all work performed by humans, be that control of technological devices or of social structures of humans themselves. This makes it possible to universally define the cost price of any type of goods or services as equal, to the accuracy of a constant multiplier, to labor time of people producing these goods or services. All types of goods and services produced, per unit working time, by the technologically armed workers of the civilization, will have one and the same cost price. Cost price paid to the worker by the consumer of the worker's production is sufficient to ensure normal living standard of the worker. Importantly, this "cost price" level of the living standard in the civilization is significantly higher than simply the level of survival (poverty threshold).

Cost price for any type of goods and services produced by humans can be quantified in the absolute terms of labor time. In monetary terms it is equal to the mean wages of human population (seven U.S. dollars per hour on a global average). This "cost price" level of the living standard in the civilization is significantly higher than simply the level of survival (poverty threshold).

Labor time varies modestly from profession to profession, so it can be put equal to eight-hour working day for all activities. Consequently, cost price of all goods and services delivered to the market can be considered proportional to the number of working people with one and the same proportionality coefficient for all types of goods and services. In terms of money, it can be defined as the price paid for this labor time to workers producing conventional goods which make up most part of the consumer basket in the civilization. As far as the overwhelming majority of workers produce conventional goods and services, while the proportion of workers producing novel expensive goods is negligible (see the sections to follow), it is possible to quantify the cost price via mean wages that on a global average are of the order of a few USD per hour (global GDP in 2005 being 45 × 1012 USD (data of World Bank, www.worldbank.org, 2007), world population 6.3 billion people, assuming 50% working population (see Table 1 below) and 2100 working hours per year, we obtain ~ 7 USD/hour).

With the progress of civilization and change of technologies, there appear novel goods in the market that are attractive to the consumers. In the end of the XIXth such goods could be exemplified by the first ever telephones and automobiles, while towards the end of the XXth century those were mobile phones and personal computers. Until the market is saturated by such novel goods, the demand for them significantly exceeds the offer. Their market price and, hence, profit of the industry owner and potential wages of the workers, significantly exceed the cost price of the novel goods. This initial unstable price is critical with respect to either expansion or shrinkage of the output. High initial prices of the monopolistically produced novel goods and services ensure stable presence of such goods and services in the market.

Monopoly over production of novel expensive goods cannot be eternally sustained. Economic competition leads to an increase in the number of companies producing such goods and in the production rates, and makes the price of goods fall from some initial value towards the cost price. In the stationary state consumption and production become saturated. The goods are sold at their cost price. Since then market price fluctuates stably around the stationary point corresponding to the cost price. When the competition in the sphere of goods output is well developed, the consumer is reluctant to buy the goods at a higher price. Conversely, when the goods are overproduced, the market price falls below the cost price, and the manufacturers have to reduce production, which leads to a rise of unemployment.

With technological development of the civilization, one and the same number of workers becomes able to produce greater amounts of conventional goods per unit time. Consequently, the consumer can acquire greater amounts of conventional goods as payment for unit working time. This constitutes the essence of the civilization progress and is traditionally interpreted as increase in living standards. It is possible to sell novel expensive goods at prices significantly exceeding their cost price namely due to this important condition: the amount of money received by the worker when his production is sold at cost price is consistently greater than the poverty threshold, i.e. than the minimal income compatible with existence. People in the civilization can produce more goods than they need to simply remain alive. The difference between cost price level wages and minimal life-compatible income can be spent on buying novel expensive goods.

People in the civilization can produce more goods than they need to simply remain alive. The difference between cost price level wages and minimal life-compatible income can be spent on buying novel expensive goods. The excessive amounts of money compared to goods and services in the market leads to inflation, which is therefore an unavoidable economic by-product of the technological progress, as dictated by the law of matter conservation.

The time of production of novel expensive goods is finite, from their initial appearance in the market to the moment of saturation of the demand with transition of the goods into the category of conventional goods, after which they are sold at cost price. During this time the owner of the production process acquires a finite sum of money. This sum arises due to the fact that some part of the population bought the novel expensive goods instead of some conventional goods. A certain amount of conventional goods thus remained unclaimed by the consumers. This effectively means overproduction of the conventional goods, which would not have occurred in the absence of novel expensive goods. The cumulative cost price of the conventional goods that remained unclaimed during the entire time of production of the novel expensive goods is equal to the sum of money received by the owner of the output of the novel goods. In the result, the unclaimed conventional goods are discarded and leave the economics, while the sum of money equal to their cost price, now owned by the producer of novel goods, remains available in the market. The excessive amounts of money compared to goods and services in the market leads to inflation, which is therefore an unavoidable economic by-product of the technological progress.

However, the possibility of making big fortunes by people involved in production of novel goods stimulates further search of such goods and, thus, contributes to the technological progress of the civilization. This financial encouragement of economic and technological progress is widely recognized as an advantage of market economy. Significant technological advancements are relatively rare. The originally high prices of novel expensive goods fall rapidly down towards the cost price. At any given moment of time only a small share of goods in the market is being sold at prices greatly in excess of cost price. Therefore, inflation rates inherently associated technological progress should be relatively modest. The main contribution to inflation in modern economics comes from financial fluxes that arise when the civilization pay the high market prices for raw materials and energy, see Section 4.

To cite this document:

Makarieva A.M., Gorshkov V.G., Li B.-L. (2010) Comprehending ecological and economic sustainability: Comparative analysis of stability principles in the biosphere and free market economy. Annals of the New York Academy of Sciences, 1195, E1-E18. Abstract. pdf doi:10.1111/j.1749-6632.2009.05400.x, first published as PNPI Preprint No. 2763.