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or, Why you can buy lots of junk for very little, and can't get the things you need.

This node was inspired by two things: my recent attempt to buy RAM and Lucy-S's node on health care. These two things are connected, in both being examples of the way inflation works in the New Economy.

Production is not increasing; it is just becoming more specialized.
I saw a diagram in an issue of Wired I was reading a few weeks ago, that showed that while the value of the United States's production has gone up, even taking into account inflation, the actual physical volume of goods has not changed that much since the late 1970's. I don't know how precise these figures are, but they seem to make sense to me. After all, a modern CD player doesn't weigh any more than a cassette deck. It does, however, provide more utility, although as we will see, perhaps not that much more.

Where is the growth of the economy coming from, then? I won't deny that in relation to the consumer goods we had 20 years ago, the choices and quality of the goods we have now is much wider and in many ways much better. But to what extent are they better, and what is the cost for the improvement?

Example One: A Table
A table is a pretty simple consumer good. It has four legs and a flat surface. Therefore, it should be pretty easy to produce and should be pretty cheap. Which it is, in many cases. I can go down to to the Goodwill bins and buy a table for 5 or 10 dollars that will function perfectly well for most of my needs. I could buy another table that was designed by someone who studied at RISD, and has a master's degree in antique restoration, and carved the table out of black walnut over the course of three months. This table is going to cost you several thousand dollars. While I don't want to denigrate artistry, and judging the utility in this case is awfully subective, the thousand dollar table provides little more utility than the table bought at a garage sale, while costing maybe hundreds of times more. From thinking about this example, I came up a rule, that 10% of the cost provides 90% of the utility. With the other 90% of cost covering another 9% of utility.

Of course, these numbers are fairly arbitrary, it could as well be 80\20, but the point remains: most of the uses of any economic good can now be covered for fairly cheap.

An actual useful example: computers
I am sure many of you aren't in the market for furniture that could be in a museum. So let's look at something that we all are using right now, and which is one of the major building blocks of the New Economy: computers. Right now, I am working on a Pentium 2 300 MHz machine with 64 MBs of RAM. This computer fulfills pretty much all of my needs: 90% of my computer use consists of Web surfing, word processing, chatting and playing some games. I can do this on a computer system that probably has a value of less than 100 dollars. It's hard to calculate the economic value of a computer system like mine because stores can't make enough money selling them to do so. But once again, we see there is a 10% of the utility that I can't get out of my computer: recent games, ability to play lots of multimedia while doing other things, 3D Graphics manipulation and the like. It could all be done, but buying such a system would cost me between 500 and 2000 dollars. So I would once again be paying many times my cost to get a small increase in utility.

The big example: Health Care
Health Care is probably the area of the economy in which this is most marked. The increase in utility comes into play even more here because of cultural values and people's moral beliefs. Take a person with a bit of hay fever. They can go to a local grocery store and buy a hundred pills of diphenahydramine for under ten dollars. Benadryl deals with allergies fairly well, but because of the drowsy side effects, it might not be considered ideal. The other option here is to go buy a new, designer antihistamine such as Claritin, which costs about a dollar a pill or more. Claritin, lacking side effects and being longer lasting, could be said to have a utility of 99%. Of course, maybe that is also not effective, so someone goes to a doctor and gets a prescription for Allegra. Allegra, like Claritin, is a non-drowsy anti-histamine. I don't know why it is prescription, but it probably is marginally more effective than Claritin. Let's say it has a utility of 99.5%. After factoring in the cost of visiting a doctor and paying for the prescription, the cost maybe 10 times that of claritin. Which means to go from the cost of taking diphenadyramine to the cost of Allegra may be 100 times as much money, for an added 9.5% of utility.

These are, of course, just estimates, but I think everyone would agree in principle that every small increase in medical effectiveness comes at a increasingly larger economic cost. But due to culture values, this is seen as neccesary. Who wouldn't agree to pay twice as much for a medicine that is going to give their children a 99% shot at good health than one that gives them a 98% chance? On the other hand, when everyone has this attitude, it is making it impossible for anyone to get good medical care.

As I discussed in The Two Tiered Economy, this new version of economics isn't something that many people are picking up on, even people who would have the ability to understand it. For people who grew up in the depression, it is still hard to understand that most consumer goods have a next to negligible economic cost. What is powering the economy now is people's desire to get closer and closer to perfection in certain areas. In areas like computers, the availability of low cost computers with large functionality has kept the prices of computers from rising too much. In the field of health care, where the slight increase in utility is seen as a moral imperative, the attempt at controlling costs has been much less.

I haven't had much formal training in economics, so I hope I didn't just reinvent the wheel. I am sure that the decline in utility even with larger costs has occured to people before, but the greatly accelerated rate at which is happening may not be seen as the cornerstone of the current economy that it is.